Suppose That a Firm Always Announces a Yearly Dividend at the End

question 53

Multiple Choice

Suppose that a firm always announces a yearly dividend at the end of the first quarter of the year, but then pays the dividend out as four equal quarterly payments. If the next such "annual" dividend has been announced as $5, it is exactly one quarter until the first quarterly dividend from that $5, the effective annual required rate of return on the company's stock is 14 percent, and all future "annual" dividends are expected to grow at 4 percent per year indefinitely, how much will this stock be worth?

• A) $17.10
• B) $50.00
• C) $52.55
• D) $57.00

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Definitions:

Chapter 7

A provision in the United States bankruptcy code allowing for the liquidation of a debtor's assets to pay off creditors.

Secured Creditors

Creditors who have a legal claim to a debtor's assets as collateral for a debt, giving them a priority position over unsecured creditors in case of bankruptcy.

Liquidation Bankruptcy

A bankruptcy procedure where a debtor's assets are sold off to pay creditors, typically under Chapter 7 in the United States.

Savings and Loan Association

A financial institution that specializes in accepting savings deposits and making mortgage and other loans.