A stock expects to pay a year-end dividend of $2 a share (i.e., D1 = $2; assume

Question

A stock expects to pay a year-end dividend of $2 a share (i.e., D1 = $2; assume that last year's dividend has already been paid). The dividend is expected to fall 5% a year forever (i.e., g = -5%). The company's expected and required rate of return is 15%. Which of the following statements is most correct? (Points : 6)
A. The company's stock price is $10.
B. The company's expected dividend yield 5 years from now will be 20%.
C. The company's stock price 5 years from now is expected to be $7.74.
D. Both answers B and C are correct.
E. All of the above answers are correct.

Explanation / Answer

B. The company's expected dividend yield 5 years from now will be 20%.

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