A Share of Stock Has a Dividend of D0 =

question 89

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:

Annuity

A financial instrument designed to offer a steady flow of income to someone, mainly used for retirement purposes.

Quarterly

Pertaining to something that occurs every three months or four times a year.

Life Annuity

An insurance product that guarantees regular payments to the annuitant for life, in exchange for an initial investment.

Term Annuity

An insurance product that pays out income over a fixed period or term, not necessarily for life.