If the Present Value Equation Used to Calculate the Price

question 36

Multiple Choice

If the present value equation used to calculate the price of a stock you are considering buying is "[$7 / (0.04 - 0.03) ]," which of the following is correct,assuming that dividends will grow at a constant rate?

• A)The stock price is $7,the dividend growth rate is 3 percent,and the interest rate is 1 percent.
• B)The dividend is $7 per share,the dividend growth rate is 1 percent,and the interest rate is 4 percent.
• C)The stock price is $700,the dividend growth rate is 3 percent,and the interest rate is 4 percent.
• D)The dividend is $7 per share,the dividend growth rate is 4 percent,and the interest rate is 3 percent.

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Definitions:

Standardized Test Statistic

A test statistic that has been converted into a standard form so that it can be directly compared to a distribution.

Rank Sum

A statistical measure used to compare the distributions of two or more groups by summing ranks assigned to their observations.

Alternative Hypothesis

A statistical hypothesis that suggests a difference or effect, contrary to the null hypothesis.

Critical Value

A point on the scale of the test statistic beyond which we reject the null hypothesis, given the significance level of the test.