You Are Approached About Purchasing a Share of Common Stock

question 32

Multiple Choice

You are approached about purchasing a share of common stock in a company that will definitely go out of business exactly 2 years from today.The company is anticipated to pay a $10 dividend one year from now and a $15 dividend two years from now (immediately before it goes out of business) .What price are you willing to pay for the stock if the required rate of return on the stock is 5%?

• A) $22.68
• B) $23.13
• C) $23.81
• D) $25.00

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Definitions:

Automobiles

Wheeled vehicles powered by engines, primarily used for personal transportation.

Breakfast Cereals

Manufactured food products made from processed grains that are often eaten as the first meal of the day.

Recession

A short-term downturn in the economy characterized by decreased trade and industrial production, typically marked by a decline in gross domestic product (GDP) for two consecutive quarters.

Employment

Employment refers to the condition of having paid work or the relationship between an employer and an employee who performs work or services for compensation.