Exercise Bicycle Company Is Expected to Pay a Dividend in Year

question 40

Multiple Choice

Exercise Bicycle Company is expected to pay a dividend in year 1 of $1.20, a dividend in year 2 of $1.50, and a dividend in year 3 of $2.00. After year 3, dividends are expected to grow at the rate of 10% per year. An appropriate required return for the stock is 14%. The stock should be worth _______ today.

• A) $33.00
• B) $39.86
• C) $55.00
• D) $66.00
• E) $40.68

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Definitions:

Retained Earnings

The portion of net income left over after dividends are paid to shareholders, reinvested in the business or used to pay off debt.

Corporate Form

A legal structure for a business recognized as a separate legal entity from its owners, providing limited liability.

Partnership Form

A legal form of business operation between two or more individuals who share management and profits.

Paid-In Capital

Funds raised by a company through the issuance of shares to investors, exceeding the par or stated value of the shares.