A Stock Just Paid an Annual Dividend of $0

question 74

Multiple Choice

A stock just paid an annual dividend of $0.40 a share. The dividends are expected to grow at 15 percent for 5 years and then 3 percent forever. If the required return is 11 percent, what is the price of the stock?

• A) $6.32
• B) $8.37
• C) $7.32
• D) $5.18
• E) $9.27

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Definitions:

Specified Intervals

Pre-determined or agreed periods at which certain events or measurements take place.

Cash Flows

The total amount of money being transferred into and out of a business, especially as affecting liquidity.

Derivative Security

A financial instrument whose value is based on the performance of an underlying asset, such as stocks, bonds, commodities, or currencies.

Financial Asset

Any asset that is cash, the right to receive cash or another financial asset, or an equity instrument of another entity, such as stocks, bonds, or derivatives.