Which of the following statements is CORRECT? a. Two firms with the same expecte

Question

  Which of the following statements is CORRECT?

a.     Two firms with the same expected dividend and growth rates must also have the same stock price.

b.    It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant.

c.     If a stock has a required rate of return r = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.

d.    The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

e.     The constant growth model takes into consideration the capital gains investors expect to earn on a stock.

Explanation / Answer

Use the following information to arrive at the conclusion about the dividend growth model.

The dividend growth model is the model which is used to calculate the market price of the share.

This model takes into account the dividend paid currently, the growth rate and also the value of the required rate of return on the stock.

Observe that the following statement is correct that the constant growth model takes into account the capital gains investors expect to earn because the market price of the share consists of the total returns which also include the capital gains.

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