Modular Systems Inc

question 89

Multiple Choice

Modular Systems Inc.just paid dividend D₀,and it is expecting both earnings and dividends to grow by 0 percent in Year 1 and 2,by 5 percent in Year 3,and at a rate of 10 percent in Year 4 and thereafter.The required return on Modular is 15 percent,and it sells at its equilibrium price,P₀ = $49.87.What is the expected value of the next dividend, ? (Hint: Draw a time line and then set up and solve an equation with one unknown, )

• A) It cannot be estimated without more data.
• B) $1.35
• C) $1.85
• D) $2.35
• E) $2.85

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Definitions:

Expected Returns

The average return an investor anticipates on an investment, based on historical data, projected performance, and market analysis.

Factor Portfolio

A well-diversified portfolio constructed to have a beta of 1.0 on one factor and a beta of 0 on any other factor.

Well-Diversified Portfolio

A portfolio that contains a wide variety of investments across multiple asset classes to reduce risk.

Variance of Returns

A statistical measure that captures the dispersion or spread of an asset's returns around its mean or average return.