Exhibit 11.8 Use the Information Below for the Following Problem(S)

question 29

Multiple Choice

Exhibit 11.8
Use the Information Below for the Following Problem(S)
Fast Grow Corporation is expecting dividends to grow at a 20% rate for the next two years. The corporation just paid a $2 dividend and the next dividend will be paid one year from now. After two years of rapid growth dividends are expected to grow at a constant rate of 9% forever.
-Refer to Exhibit 11.8.Assume that the annual dividend grows at a constant rate of 9% indefinitely instead of the supernormal growth.How much is the stock worth if dividends grow annually at 9%?

• A) $40.00
• B) $43.60
• C) $45.60
• D) $47.80
• E) $52.40

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Definitions:

Production Function

An equation that describes the maximum output of a good achieved from a given number of inputs.

Input

The inputs such as labor, materials, or resources utilized in creating products and services.

Convexity

In economics and finance, convexity refers to the shape of the curve that demonstrates how the duration of a bond changes as the interest rate changes.

Production Function

An equation that specifies the output of a firm, an industry, or an entire economy for all combinations of inputs.