You Are Considering the Purchase of a Common Stock That

question 52

Multiple Choice

You are considering the purchase of a common stock that paid a dividend of $2.00 yesterday.You expect this stock to have a growth rate of 15 percent for the next 3 years,resulting in dividends of
D1 = $2.30,D2 = $2.645,and D3 = $3.04.The long-run normal growth rate after year 3 is expected to be
10 percent (that is,a constant growth rate after year 3 of 10% per year forever) .If you require a 14 percent rate of return,how much should you be willing to pay for this stock?

• A) $89.75
• B) $83.65
• C) $56.46
• D) $62.57

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Definitions:

Standard Deviation

A statistical measure that quantifies the amount of variation or dispersion of a set of data values from its mean.

Sample Average

The sum of all values in a sample divided by the number of values, providing a central tendency measure of the sample.

Population Average

The mean value calculated for a specific characteristic within a given population.

Illusion of Control

The illusion of control is a cognitive bias where individuals overestimate their ability to influence events and outcomes that are largely beyond their control.