A Stock Expects to Pay a Year-End Dividend of $2

question 72

Multiple Choice

A stock expects to pay a year-end dividend of $2.00 a share (i.e., D1 = $2.00; assume that last year's dividend has already been paid) . The dividend is expected to fall 5 percent a year, forever (i.e., g = -5%) . The company's expected and required rate of return is 15 percent. Which of the following statements is most correct?

• A) The company's stock price is $10.
• B) The company's expected dividend yield 5 years from now will be 20 percent.
• C) The company's stock price 5 years from now is expected to be $7.74.
• D) Both answers b and c are correct.
• E) All of the above answers are correct.

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Definitions:

Total Credits

The sum of all credit entries recorded in the accounting books of a business, reflecting the total value of transactions decreasing assets or increasing liabilities and equity.

Beginning Balance

The sum of funds in an account at the beginning of a new accounting cycle, transferred from the conclusion of the last period.

Chronological Record

A method of recording events or transactions in the order of their occurrence in time.

Debits and Credits

Accounting entries that either increase or decrease accounts on a company's balance sheet and income statement.