A Share of Stock Has a Dividend of D₀ =

question 6

Multiple Choice

A share of stock has a dividend of D₀ = $5.The dividend is expected to grow at a 20 percent annual rate for the next 10 years,then at a 15 percent rate for 10 more years,and then at a long-run normal growth rate of 10 percent forever.If investors require a 10 percent return on this stock,what is its current price?

• A) $100.00
• B) $82.35
• C) $195.50
• D) $212.62
• E) The data given in the problem are internally inconsistent,i.e. ,the situation described is impossible in that no equilibrium price can be produced.

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Definitions:

Marginal Revenue Product

Marginal revenue product is the additional revenue generated from the use of one more unit of a variable input, holding other inputs constant.

Productive

The ability to produce a substantial amount of goods or services, or doing so efficiently.

Wage Differentials

Wage differentials are the variations in wage rates due to the differences in occupation, industry, geographic location, or within a company, among other factors.

College Graduates

People who have finished their studies and earned a degree from a higher education institution.