A Stock Is Not Expected to Pay a Dividend Over

question 23

Multiple Choice

A stock is not expected to pay a dividend over the next four years. Five years from now, the company anticipates that it will establish a dividend of $1.00 per share . Once the dividend is established, the market expects that the dividend will grow at a constant rate of 5 percent per year forever. The risk-free rate is 5 percent, the company's beta is 1.2, and the market risk premium is 5 percent. The required rate of return on the company's stock is expected to remain constant. What is the current stock price?

• A) $ 7.36
• B) $ 8.62
• C) $ 9.89
• D) $10.98
• E) $11.53

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Definitions:

Estimated Fixed Costs

Forecasted expenses that do not vary with the level of production or sales over a specific period of time.

Net Sales

This refers to the total revenue from sales minus returns, allowances for damaged or missing goods, and discounts.

Contribution Margin Ratio

The percentage of each sales dollar that is available to cover the fixed costs and provide an operating income.