A Share of Stock Has a Dividend of D₀ =

question 6

Multiple Choice

A share of stock has a dividend of D₀ = $5.The dividend is expected to grow at a 20 percent annual rate for the next 10 years,then at a 15 percent rate for 10 more years,and then at a long-run normal growth rate of 10 percent forever.If investors require a 10 percent return on this stock,what is its current price?

• A) $100.00
• B) $82.35
• C) $195.50
• D) $212.62
• E) The data given in the problem are internally inconsistent,i.e. ,the situation described is impossible in that no equilibrium price can be produced.

---

Definitions:

Income Taxes

Taxes imposed by the government on the income generated by individuals and businesses.

Capital Budgeting

The process of planning and managing a company's investments in major projects or assets with long-term implications.

Working Capital

The difference between a company's current assets and current liabilities, indicating its short-term financial health and operational efficiency.

Straight-Line Depreciation

A way of distributing the financial burden of a tangible asset over its lifespan in equal yearly portions.