# 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

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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