Mountain Top Nursery Is a Relatively Young Firm Which Just

question 20

Multiple Choice

Mountain Top Nursery is a relatively young firm which just paid its first annual dividend of $0.30 a share.Management projects dividend increases of 15 percent per year for five years followed by a constant growth rate of 3.0 percent annually.What is this stock worth today if the applicable discount rate is 12.5 percent?

• A)$3.59
• B)$4.66
• C)$5.23
• D)$6.01
• E)$6.59

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Definitions:

Financial Leverage

The use of borrowed funds to increase the potential return of an investment, which also increases the risk of loss.

Sensitivity of EPS

The degree to which a company's earnings per share (EPS) is affected by fluctuations in its operating income.

ROE

A measure of a corporation's profitability that reveals how much profit a company generates with the money shareholders have invested.

Target Capital Structure

The optimal mix of debt, preferred stock, and common equity that a company aims to maintain for financing its operations.