If the Present Value Equation Used to Calculate the Price

question 211

Multiple Choice

If the present value equation used to calculate the price of a stock you are considering buying is "[$12 / (0.05 - 0.02) ]," which of the following is correct,assuming that dividends will grow at a constant rate?

• A)The stock price is $12,the dividend growth rate is 2 percent,and the interest rate is 5 percent.
• B)The dividend is $12 per share,the dividend growth rate is 2 percent,and the interest rate is 5 percent.
• C)The stock price is $12,the dividend growth rate is 5 percent,and the interest rate is 3 percent.
• D)The dividend is $12 per share,the dividend growth rate is 5 percent,and the interest rate is 2 percent.

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Definitions:

Sales and Administrative Expenses

Costs related to the selling of products and the management of the company, excluding production costs.

Direct Labor

Direct labor involves the work of employees that is directly attributable to the production of goods or services, such as the labor of a factory worker assembling a product.

Factory Overhead Cost

All indirect costs related to manufacturing, excluding direct materials and direct labor expenses.

Depreciation

The structured apportioning of the price of a tangible asset across its operational life.