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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 Preview

    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 Summary

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

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