Which of the Following Statements Is CORRECT

question 30

Multiple Choice

Which of the following statements is CORRECT?

• A)The constant growth model takes into consideration the capital gains investors expect to earn on a stock.
• B)Two firms with the same expected dividend and growth rate must also have the same stock price.
• C)It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant.
• D)If a stock has a required rate of return r_s = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.
• E)The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

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Definitions:

Good Theory

A well-substantiated explanation of some aspect of the economic world that can predict outcomes and withstand empirical testing.

Forecasting Ability

The capability to predict future trends, events, or behaviors based on past and current data.

Complex Reality

The concept that reality is composed of many interacting components that can be difficult to fully understand or predict.

Economic Theory

A set of principles and models that attempts to explain the relationships among economic variables and to predict future economic outcomes.