USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)

question 50

Multiple Choice

USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
Fast Grow Corporation is expecting dividends to grow at a 20 percent rate for the next two years. The corporation just paid a $2 dividend, and the next dividend will be paid one year from now. After two years of rapid growth, dividends are expected to grow at a constant rate of 9 percent forever.
-Refer to Exhibit 8.5. Assume that the annual dividend grows at a constant rate of 9 percent indefinitely instead of the supernormal growth. How much is the stock worth if dividends grow annually at 9 percent?

• A) $40.00
• B) $43.60
• C) $45.60
• D) $47.80
• E) $52.40

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Definitions:

Moral Hazard

The risk that one party to a contract can change their behavior to the detriment of another party, knowing that they won't have to bear the full consequences of their actions.

Piece-rate Garment Worker

A worker in the garment industry who is paid for each piece produced, rather than receiving an hourly wage.

Hourly Salesman

A salesperson who is compensated based on the number of hours worked, rather than commission on sales made.

Moral Hazard

A situation where one party is inclined to take risks because the negative consequences of the risk will be borne by another party.