Combined Communications Is a New Firm in a Rapidly Growing

question 39

Multiple Choice

Combined Communications is a new firm in a rapidly growing industry.The company is planning on increasing its annual dividend by 15 percent a year for the next 4 years and then decreasing the growth rate to 3.5 percent per year.The company just paid its annual dividend in the amount of $0.20 per share.What is the current value of one share of this stock if the required rate of return is 15.5 percent?

• A)$1.82
• B)$2.04
• C)$2.49
• D)$2.71
• E)$3.05

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Definitions:

IRR

Internal Rate of Return, a financial metric used to evaluate the profitability of potential investments, representing the discount rate that makes the net present value of cash flows from a particular project equal to zero.

Cash Flows

The sum of all money movements into and out of a corporation, directly impacting its immediate financial health.

Required Rate

The least annual percentage gain that entices investors, be they individuals or companies, into a certain security or project.

Discounted Payback Period

The time period needed to recover the cost of an investment when considering the time value of money through discounted cash flows.