The Common Stock of Average Corporation Is Selling for $10

question 27

Multiple Choice

The common stock of Average Corporation is selling for $10 a share and is expected to pay a dividend of $0.50 a share next year. If dividends are expected to grow at a constant rate of 4%
Indefinitely, what is the market requiring as a return on this company's stock?

• A)5.0%
• B)4.0%
• C)9.0%
• D)1.4%

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Definitions:

Ordinary annuity

Regular payments of the same amount made at set intervals, during which interest is calculated and added at the end of each period.

Conditional sale contract

An agreement where the sale is conditional upon certain terms, often used in property and vehicle sales where possession is granted but legal ownership is retained by the seller until full payment is received.

Compounded monthly

The process of adding interest to the principal sum of a loan or deposit, where the interest is added monthly.

Compounded monthly

The process of calculating interest on an investment or loan each month, with each month's interest added to the principal.