Sam Is Evaluating a Stock That Is Expected to Pay

question 53

Multiple Choice

Sam is evaluating a stock that is expected to pay a $1.25 per share dividend at the beginning of next year. He expects the dividend to grow by 10% per year and has determined that 12% is an appropriate required return for the stock. What is the highest amount he should pay for the stock?

• A) $1.25
• B) $12.50
• C) $15.00
• D) $62.50

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Definitions:

Simplify

The process of reducing an expression to its most compact or simplest form without changing its value.

Expression

An arrangement of symbols representing a value or denoting a mathematical operation, without an equality sign.

Exponents

Numbers that indicate how many times a base is to be multiplied by itself.

Rational Exponents

Exponents that are fractions, where the numerator represents a power and the denominator represents a root of the base number.