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:

Independence Test

A statistical procedure used to determine if there is no association between two variables or groups.

Critical Value Approach

A method in hypothesis testing that involves comparing the test statistic to a critical value to decide whether to reject the null hypothesis.

Observed Values

Data points that have been collected or measured from an experiment or survey.

P-Value Approach

A statistical method used to determine the significance of the results from a hypothesis test.