On a Certain Date, Kastbro Has a Stock Price of $42.50

question 40

Multiple Choice

On a certain date, Kastbro has a stock price of $42.50, 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 $42.50.
• B) No, since the constant dividend growth rate gives a stock estimate greater than $42.50.
• C) Yes, since the constant dividend growth rate gives a stock estimate greater than $42.50.
• 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:

Five-factor Model

A framework identifying five major dimensions of human personality: openness, conscientiousness, extraversion, agreeableness, and neuroticism.

Agreeableness

A personality trait characterized by warmth, kindness, and a willingness to cooperate and avoid conflict.

Neuroticism

A personality trait characterized by moodiness, anxiety, and emotional instability.

Social Desirability

The behavior of those answering questions to do so in a manner they assume will generate favorable opinions from others.