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

question 67

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 = σ5%) . 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:

Expansion

The process of increasing the size, scale, or scope of a business or organization's operations, typically by entering new markets or increasing product lines.

Corporate Strategy

A high-level plan for a company to achieve specific business objectives and competitive advantage.

Growth Strategy

An approach by which an organization aims to expand its size, revenues, market presence, or competitive position.

Products and Services

The goods manufactured and the activities offered by businesses to satisfy consumer needs and wants.