ABC Company Has Been Growing at a 10 Percent Rate

question 71

Multiple Choice

ABC Company has been growing at a 10 percent rate, and it just paid a dividend of D0 = $3.00. Due to a new product, ABC expects to achieve a dramatic increase in its short-run growth rate, to 20 percent annually for the next 2 years. After this time, growth is expected to return to the long-run constant rate of 10 percent. The company's beta is 2.0, the required return on an average stock is 11 percent, and the risk-free rate is 7 percent. What should the dividend yield (D1/P0) be today?

• A) 3.93%
• B) 4.60%
• C) 10.00%
• D) 7.54%
• E) 2.33%

---

Definitions:

Intrinsically Motivated

Driven by internal rewards, meaning performing an action or behavior because it is personally rewarding.

Long-Term Goal

An objective set to be achieved in the future that requires time and planning beyond the immediate period.

Natural Talent

Innate ability or skill in a particular area without the need for extensive training or practice.

Biological Parents

The individuals from whom one inherits their genetic characteristics, often referred to as birth parents.