Savickas Petroleum's Stock Has a Required Return of 12%, and the Stock

question 11

Multiple Choice

Savickas Petroleum's stock has a required return of 12%, and the stock sells for $40 per share. The firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D4 = $1.00(1.30) ⁴ = $2.8561. After t = 4, the dividend is expected to grow at a constant rate of X% per year forever. What is the stock's expected constant growth rate after t = 4, i.e., what is X?

• A) 5.17%
• B) 5.44%
• C) 5.72%
• D) 6.02%
• E) 6.34%

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Definitions:

Privately Placed Bonds

Bonds that are sold directly to a small group of investors instead of being offered to the general public, often to avoid the costs and regulations of a public offering.

Warrants

Financial derivatives that give the holder the right, but not the obligation, to buy or sell a security at a specified price before a certain date.

Employee Options

A form of employee benefit that gives employees the right to purchase company stock at a set price at a future date.