Reference no: EM131340382
1. If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.
a. The expected return on the stock is 5% a year.
b. The stock’s dividend yield is 5%.
c. The price of the stock is expected to decline in the future.
d. The stock’s required return must be equal to or less than 5%.
e. The stock’s price one year from now is expected to be 5% above the current price.
2. A stock is expected to pay a year-end dividend of $2.00 a share (D1 = $2.00). The dividend is expected to decline at a rate of 5% a year constantly (g = -5%). The company’s expected and required rate of return is 15%. Which of the following statements is CORRECT?
a. The company’s current stock price is $20.
b. The company’s dividend yield 5 years from now is expected to be 10%.
c. The company’s stock price next year is expected to be $9.50.
d. The company’s expected capital gains yield is 15%.
e. The constant growth model cannot be used because the growth rate is negative.
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