Suppose That a Firm Always Announces a Yearly Dividend at the End

question 52

Multiple Choice

Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such "annual" dividend has been announced as $1, it is exactly one quarter until the first quarterly dividend from that $1, the effective annual required rate of return on the company's stock is 10 percent, and all future "annual" dividends are expected to grow at 5 percent per year indefinitely, how much will this stock be worth?

• A) $19.79
• B) $20.74
• C) $21.26
• D) $21.37

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Definitions:

Economic Rent

It is the payment to an owner or factor of production in excess of the costs needed to bring that factor into production. In other words, it's the extra income earned from a resource without investing in additional effort or cost.

Net Productivity

The actual output after subtracting the inputs used in the production process, indicating the efficiency of production.

Capitalization

The total market value of a company's outstanding shares, representing the investment community's perception of its worth.

Recognizing

The act of identifying, acknowledging, or understanding something as being true or valid.