Question

You are considering investing in a common stock. You will receive a payment of \$60 one...

You are considering investing in a common stock. You will receive a payment of \$60 one year from today from the stock. You will continue to receive payments from the stock each year forever but the payments will become 8 percent larger each year. You require a 12 percent rate of return on this type of investment. How much is the most you should be willing to pay to buy a share of this stock?

• A. \$1,500
• B. \$750
• C. \$500
• D. \$67.20
• E. Something Else

Suppose we are considering investing in a stock that just paid a dividend of \$10 per share. The dividends will grow at a 10 percent rate for the next 2 years. After that, they will grow at a 6 percent rate forever. You require a 12 percent return on this type of investment. What is the value of a share of stock in this Company? Carry out your calculations to three decimal places.

• A. \$ 181.286
• B. \$12.826
• C. \$225.867
• D. \$189.881
• E. More than \$250

You have computed the share price of the Dipstick Professor Company to be \$39.54 per share. The required rate of return used to compute the share price was 32 percent. The company has 100,000 shares of common stock outstanding. The return on equity for the past 10 years has been 14 percent. What is the value of the entire equity stake in the Dipstick Professor Company (what is the market capitalization of the company)?

• A. \$0.0003954
• B. \$1,265.28
• C. \$3,954,000
• D. \$553.56
• E. \$553,560

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