On a Certain Date, Kastbro Has a Stock Price of $42.50

question 40

Multiple Choice

On a certain date, Kastbro has a stock price of $42.50, pays a dividend of $0.64, and has an equity cost of capital of 8%. An investor expects the dividend rate to increase by 6% per year in perpetuity. He then sells all stocks that he owns in Kastbro. Given Kastbro's share price, was this a reasonable action?

• A) No, since the constant dividend growth rate gives a stock estimate of $42.50.
• B) No, since the constant dividend growth rate gives a stock estimate greater than $42.50.
• C) Yes, since the constant dividend growth rate gives a stock estimate greater than $42.50.
• D) No, since the difference between his calculated stock price and the actual stock price most likely indicates that his estimate of dividend growth rate was incorrect.

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Definitions:

Negotiable Instruments

Legal documents guaranteeing the payment of a specific amount of money, either on demand or at a set time, with the payee's name either mentioned or left blank.

Bill Of Sale

A legal document that serves as proof of transfer of ownership from the seller to the buyer.

Bills Of Exchange Act

The Bills of Exchange Act is legislation that regulates the creation, transfer, obligations, and rights of parties involved in bills of exchange, a form of negotiable instrument used in trade and finance.

Promissory Notes Act

Legislation that governs the issuance, form, and effects of promissory notes, which are written promises to pay a specified sum of money to a specified person or the bearer at a specified time.