IBM's stock price is $22, it is expected to pay a $2 dividend, and analysts expect the firm to grow at 10 percent per year for the next five years. TDI's stock price is $10, it is expected to pay a $1 dividend, and analysts expect the firm to grow at 12 percent per year for the next five years. What is the difference in the two firms' required rate of returns?
A)2.91 percent
B)1.82 percent
C)2.03 percent
D)3.23 percent

Question

Quizplus · Accepted Answer

The correct answer is A because the difference in the two firms' required rate of returns is 2.91 percent. This is calculated by subtracting the required rate of return for IBM (10.09%) from the required rate of return for TDI (13.00%).

IBM's Stock Price Is $22, It Is Expected to Pay