Practice Problems

10. The current market price of a share of common stock is $31.50. The most recent dividend paid on stock is $4.00 [D.). The dividends are expected to grow at a constant rate of 5% per year for ever. The required rate of return on the stock is 18%. Then the following is true according to the dividend growth model: a. the stock is underpriced b. the stock is overpriced c. the stock is correctly priced Spring 2020 11 Page 11. The current market price of a share of common stock is $63.00. The cash dividend paid just now is $6 [Do]. The dividends are expected to grow at a constant rate of 5% per year for ever. The required rate of return on the common stock is 15%. Then the following is true according to the constant dividend growth model: a. the stock is underpriced b. the stock is overpriced c. the stock is correctly priced 12. A share of common stock has an expected long-run constant dividend growth rate of 5%, and the dividend expected to be paid in one year is [D: ) $4.00. The required rate of return on the common stock is 14% The common stock is selling for $45/share. Then, according to the dividend growth model, the stock is: a. overpriced b. underpriced c. correctly priced dahale