What Constant Growth Rate in Dividends Is Expected for a Stock

question 96

Multiple Choice

What constant growth rate in dividends is expected for a stock valued at $32.00 if next year's dividend is forecast at $2.00 and the appropriate discount rate is 13 percent?

• A)5.00 percent
• B)6.25 percent
• C)6.75 percent
• D)15.38 percent

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Definitions:

Income Effect

The alteration in a person's or an economy's earnings and the effect of this alteration on the demand for a specific product or service.

Substitution Effect

The economic principle that as prices rise or incomes decrease, consumers will replace more expensive items with less costly alternatives.

Real Wages

Real wages refer to the purchasing power of wages, taking into account inflation, showing the quantity of goods and services that can be bought.

Legal Minimum Wage

The lowest hourly, daily, or monthly remuneration that employers are legally allowed to pay workers.