The Next Expected Dividend for Stock P Is $2

question 40

Multiple Choice

The next expected dividend for Stock P is $2.50, the current price of the stock is $32.50, and the firm is expected to grow at a constant rate of 4 percent per year forever. The risk free rate is 3 percent, the market risk premium is 5.5 percent, 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, 11.69 percent, is greater than its required rate of return, 9.6 percent.
• B)An investor should not buy this stock because its expected rate of return, 9.6 percent, is greater than its required rate of return, 11.69 percent.
• C)An investor should not buy this stock because its intrinsic value, $44.64, is greater than its current price of $32.50.
• D)An investor should not buy this stock because its current price, $32.50, is not equal to its intrinsic value, $44.64.
• 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, 11.69 percent.

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Definitions:

Tax Revenue

The income that is gained by governments through taxation, crucial for funding public services and infrastructure.

Price Ceiling

A legal maximum price set by the government for a particular good or service, intended to prevent prices from becoming excessively high.

Shortage

A situation where the demand for a product exceeds its supply in a market.

Units

The fundamental quantities or measurements in which variables, goods, services, or products are expressed or quantified.