You Want to Earn a Return of 10% on Each

question 24

Multiple Choice

You want to earn a return of 10% on each of two stocks, A and B. Each of the stocks is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends is 6% for stock A and 5% for stock B. Using the constant-growth DDM, the intrinsic value of stock A ________.

• A) will be higher than the intrinsic value of stock B
• B) will be the same as the intrinsic value of stock B
• C) will be less than the intrinsic value of stock B
• D) The answer cannot be determined from the information given.

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Definitions:

Annuity

A finance option that grants a regular payment sequence to individuals, chiefly employed as income for retired persons.

Cash Flow

The complete total of funds entering and leaving a business, notably affecting its immediate financial resources.

Interest Expense

The cost incurred by an entity for borrowed funds over a period, which can appear on the income statement as a result of loans, bonds, or credit lines.

Semiannually

Pertains to an event or process that occurs twice a year.