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:

Efficient Means

Methods or approaches that achieve a desired outcome with the least amount of waste, effort, or expense.

Trait Theorists

Researchers who focus on the identification and measurement of specific personality characteristics or traits.

Cattell

A psychologist who made significant contributions to the fields of personality, intelligence, and psychological measurement.

Allport

Gordon Allport, a psychologist known for his theory of personality and his research on the psychology of prejudice.