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:

Invested Capital

The total amount of money that shareholders and debt holders have invested in a company for long-term use.

Gross Assets

The total asset value on a company's balance sheet before deducting any liabilities or depreciation.

Capital Asset Ratio

This ratio measures a bank's financial strength by comparing its capital to its assets, assessing the bank's ability to withstand losses.

IRS Regulations

Rules and guidelines issued by the Internal Revenue Service that govern how taxes should be paid and reported in the U.S.