Which of the Following Statements Is CORRECT

question 53

Multiple Choice

Which of the following statements is CORRECT?

• A) If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
• B) The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.
• C) The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.
• D) The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time.
• E) The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

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Definitions:

Spot Market

An open financial market where commodities or financial instruments are exchanged and delivered right away.

Discount

To calculate the present value of some future amount.

Future

A standardized legal contract to buy or sell a particular commodity or financial instrument at a predetermined price at a specified time in the future.

Forward Market

A marketplace for financial contracts that are agreed upon now but settled at a future date.