You Are Approached About Purchasing a Share of Common Stock

question 65

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:

Percentage Analysis

A financial analysis technique that involves expressing each item in a financial statement as a percentage of a base amount to assess the financial health and performance of a company.

Financial Statement

A formal record of the financial activities and position of a business, individual, or other entity, usually presented in a structured manner for a specific period.

Return On Total Assets

A profitability ratio that measures the profitability of total assets without considering how the assets are financed, computed as income plus interest expense divided by average total assets.

Profitability

A measure of how effectively a company generates profit from its revenues or assets.