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:

DSM-IV-TR

The Diagnostic and Statistical Manual of Mental Disorders, Fourth Edition, Text Revision; a manual published by the American Psychiatric Association detailing diagnostic criteria for mental disorders.

Disruptive Behavior Patterns

Actions or sequences of actions that interrupt the normal flow or functioning of a social or operational system.

Significant Behavior Patterns

Regularly occurring actions or reactions that have importance in predicting or understanding an individual's behavior.

Obsessions

Persistent, unwanted thoughts, images, or impulses that cause significant distress or anxiety.