An Issue of Common Stock Currently Sells for $50

question 47

Multiple Choice

An issue of common stock currently sells for $50.00 per share,has an expected dividend to be paid at the end of the year of $2.50 per share,and has an expected growth rate to infinity of 5% per year.If investors' required rate of return for this particular security is 12% per year,then this security is

• A)overvalued and offering an expected return higher than the required return.
• B)undervalued and offering an expected return higher than the required return.
• C)overvalued and offering an expected return lower than the required return.
• D)undervalued and offering an expected return lower than the required return.

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Definitions:

Cost

The monetary value spent to produce or obtain goods and services, including manufacturing, material, labor, and overhead costs.

Units

Basic quantities or measures adopted to quantify and measure goods, services, or any other items.

Production Function

A mathematical representation that explains how inputs in production are related to the goods or services produced.

Proportions

Ratios or fractions that express the relationship of one part to another or to the whole with respect to quantity, size, or amount.