Sub: Finance Topic: Dividend discount Model
Multiple choice questions using dividend discount Model
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Choose the correct answer from the given option.
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
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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