Finance Dividend discount Model : Multiple choice questions

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					              Sub: Finance                                                        Topic: Dividend discount Model



              Question:
               Multiple choice questions using dividend discount Model
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              Choose the correct answer from the given option.

              Solution:
              1. The XYZ Company, whose common stock is currently selling for $40 per
                    share, is expected to pay a $2.00 dividend in the coming year. If investors
                    believe that the expected rate of return on XYZ is 14 percent, what growth
                    rate in dividends must be expected?
                      a. 5 percent
                      b. 14 percent
                      c. 9 percent

                      d. 6 percent


              Answer:

               Particulars                                                                                          Amount

               Current selling price (P0)                                                                                 $40

               Expected dividend (D1)                                                                                      $2

               Expected rate of return (Ke)                                                                              14%

               Growth rate (g = Ke - (D1/P0))                                                                             9%



              Option (c) 9%

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Description: Compute the required rate of return of using CAPM. : The return for the market during the next period is expected to be 16 percent; the risk-free rate is 10 percent.
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