An Issue of Common Stock Is Expected to Pay a Dividend

question 50

Multiple Choice

An issue of common stock is expected to pay a dividend of $5.15 at the end of the year. Its growth rate is equal to 6%. If the required rate of return is 10%, what is its current price?

• A) $128.75
• B) $36.92
• C) $96.00
• D) None of these

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Definitions:

Risk Premium

The additional return an investor expects to receive from an investment by taking on a higher level of risk.

Risk-Free Interest

Risk-free interest is the theoretical rate of return of an investment with zero risk, serving as a benchmark for evaluating the risk and return of other investments.

Negative Beta Stocks

These are stocks that tend to move inversely to the overall stock market; when the market rises, these stocks' prices may fall, and vice versa.

High Beta Stocks

Stocks that are more volatile than the market, typically reacting more strongly to market changes.