Exhibit 20-6 USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)

question 66

Multiple Choice

Exhibit 20-6
USE THE FOLLOWING INFORMATION FOR THE NEXT PROBLEM(S)
Consider a firm that has just paid a dividend of $2. An analyst expects dividends to grow at a rate of 8% per year for the next five years. After that dividends are expected to grow at a normal rate of 5% per year. Assume that the appropriate discount rate is 7%.
-Refer to Exhibit 20-6. What is the future price of the stock in year 5?

• A) $113.40
• B) $122.47
• C) $132.27
• D) $142.85
• E) $154.35

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Definitions:

Variances of Stocks

Measures of the dispersion of returns for a given stock, used to assess the risk associated with holding the stock.

Return on Stock

The gain or loss on an investment in stock, represented as a percentage of the investment's initial cost.

Unsystematic Risk

The risk associated with a specific issuer or a particular industry sector, unlike systemic risk, which impacts the entire market.

Increasing Market

A market trend characterized by rising stock prices and generally optimistic investor sentiment, often associated with economic growth.