A Stock You Are Evaluating Is Expected to Experience Supernormal

question 48

Multiple Choice

A stock you are evaluating is expected to experience supernormal growth in dividends of 12 percent over the next three years. Following this period,dividends are expected to grow at a constant rate of 4 percent. The stock paid a dividend of $1.50 last year and the required rate of return on the stock is 11 percent. Calculate the stock's fair present value.

• A)$16.24
• B)$21.56
• C)$24.25
• D)$27.46
• E)None of these choices are correct.

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Definitions:

Debt-to-Equity Ratio

This ratio demonstrates the balance between debt and equity shareholders' equity in financing a company's resources.

Balance Sheet

A financial statement that reports a company's assets, liabilities, and shareholders' equity at a specific point in time.

Accounts Receivable

This is the balance of money due to a firm for goods or services delivered or used but not yet paid for by customers.

Accounts Receivable Turnover

A financial ratio that measures how efficiently a company collects revenue from its customers by comparing net credit sales to average accounts receivable.