If the Present Value Equation Used to Calculate the Price

question 36

Multiple Choice

If the present value equation used to calculate the price of a stock you are considering buying is "[$7 / (0.04 - 0.03) ]," which of the following is correct,assuming that dividends will grow at a constant rate?

• A)The stock price is $7,the dividend growth rate is 3 percent,and the interest rate is 1 percent.
• B)The dividend is $7 per share,the dividend growth rate is 1 percent,and the interest rate is 4 percent.
• C)The stock price is $700,the dividend growth rate is 3 percent,and the interest rate is 4 percent.
• D)The dividend is $7 per share,the dividend growth rate is 4 percent,and the interest rate is 3 percent.

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Definitions:

Fraction

A fractional amount that signifies a portion of a whole, distinct from an integer.

Decimal Equivalent

A decimal number that represents the same value as a given fraction or percentage.

Percent Equivalent

The fractional amount expressed as a part of one hundred.

Compound Interest

This form of interest computation involves calculating interest on both the initial principal amount and any interest that has accrued in the past periods on a loan or deposit.