A Stock Is Expected to Pay a Year-End Dividend of $2.00

question 4

Multiple Choice

A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = -5%) . If the company is in equilibrium and its 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 constant growth model cannot be used because the growth rate is negative.
• D) The company's expected capital gains yield is 5%.
• E) The company's expected stock price at the beginning of next year is $9.50.

---

Definitions:

Cumulative Preferred Stock

Stock that has a right to receive regular dividends that were not declared (paid) in prior years.

Dividends Per Share

The total dividends declared in a period divided by the number of outstanding shares of the company.

Cash Dividends

Payments made by a company to its shareholders out of its profits or reserves.

Originally Issued

Refers to securities that have been sold for the first time to investors directly by the issuing company.