What Is the Required Return for a Stock That Has

question 70

Multiple Choice

What is the required return for a stock that has a 6% constant growth rate, a price of $25, an expected dividend of $2, and a P/E ratio of 10?

• A)5%
• B)10%
• C)14%
• D)22% $25 = 2/(r - .06)

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Definitions:

Optimal Amount

The most efficient, effective, or desirable quantity of a good or resource to achieve a specific goal or maximize utility.

R&D

Research and Development; activities in businesses and organizations aimed at gaining new knowledge and applying it to develop new products, services, or processes.

Interest-Rate Cost-of-Funds

The cost of obtaining funds to borrow, typically described as an interest rate, representing the lender's compensation for the risk and time value of money.

Expected Rate of Return

An estimate of the profitability or yield of an investment, accounting for its potential risks and rewards.