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Financial Management and Stock Valuation Models

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If a stock's dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.
a. The stock's dividend yield is 5%.
b. The price of the stock is expected to decline in the future.
c. The stock's required return must be equal to or less than 5%.
d. The stock's price one year from now is expected to be 5% above the current price.
e. The expected return on the stock is 5% a year.

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Solution Summary

The solution selects the correct option with suitable explanation for how a growth in stock's dividend affects equilibrium.

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Solution:
a. The stock's dividend yield is 5%.
False, Current dividend yield=D1/Po which cannot be calculated from the information given.

b. The price of the stock is expected to decline in the future.
False, ...

Solution provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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