The Next Expected Dividend for Stock P Is $2

question 34

Multiple Choice

The next expected dividend for Stock P is $2.5, and the current price of the stock is $32.5. Its earnings, dividends, and price can be expected to grow at a constant rate of 4 percent per year. The risk free rate is 3%, the market risk premium is 5.5%, and the stock's beta is 1.2. Based on the given information, which of the following statements is correct?

• A) An investor should buy this stock because its expected rate of return is 11.69%, and its required rate of return is 9.6%
• B) An investor should not buy this stock because its expected rate of return is 9.6%, and its required rate of return is 11.69%
• C) An investor should buy this stock because its expected rate of return is 12.54%, and its required rate of return is 8.28%,
• D) An investor should not buy this stock because its expected rate of return is only 8.28%, and its required rate of return is 12.54%
• E) An investor should be indifferent toward buying or selling the stock, because its required rate of return is equal to its expected rate of return.

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Definitions:

Norepinephrine

A neurotransmitter and hormone involved in the body's fight or flight response, increasing heart rate and blood pressure.

Cortisol

A steroid hormone produced by the adrenal glands, involved in the response to stress and regulation of metabolism.

Epinephrine

A hormone and neurotransmitter also known as adrenaline; plays a key role in the fight-or-flight response by increasing heart rate and blood flow.

Blood Pressure

The force exerted by circulating blood on the walls of the body's arteries.