On a Certain Date, Kastbro Has a Stock Price of $37.50

question 24

Multiple Choice

On a certain date, Kastbro has a stock price of $37.50, pays a dividend of $0.64, and has an equity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year in perpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbro's share price, was this a reasonable action?

• A)No, since the constant dividend growth rate gives a stock estimate of $37.50.
• B)No, since the constant dividend growth rate gives a stock estimate greater than $37.50.
• C)Yes, since the constant dividend growth rate gives a stock estimate greater than $37.50.
• D)No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect.

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Definitions:

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