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

question 77

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 dividend yield 5 years from now is expected to be 10%.
• B) The constant growth model cannot be used because the growth rate is negative.
• C) The company's expected capital gains yield is 5%.
• D) The company's expected stock price at the beginning of next year is $9.50.
• E) The company's current stock price is $20.

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Definitions:

Standard Deviation

A gauge for the level of variability or disparity within a set of data points.

Interval Estimate

A type of estimate used in statistics that specifies a range within which a population parameter is expected to lie with a certain level of confidence.

Distribution

Refers to the way in which something is shared out among a group or spread over an area.

Standard Error

The standard deviation of the sampling distribution of a statistic, often used in the context of mean.