A stock is expected to pay a year-end dividend of $2.00 a share (D1 = $2.00). Th

Question

A stock is expected to pay a year-end dividend of $2.00 a share (D1 = $2.00). The dividend is expected to decline at a constant rate of 5% per year (g = -5%). The company’s expected and required rate of return is 15%. Which of the following statements is CORRECT? A. The company’s current stock price is $20 B. The company’s dividend yield 5 years from now is expected to be 10%. C. The company’s expected capital gains yield is 5%. D. The company’s stock price next year is expected to be $9.50 E. The constant growth model cannot be used because the growth rate is negative.

Explanation / Answer

V=2/1.15+((2*0.95)/0.20)/1.15=10

D. The company’s stock price next year is expected to be $9.50

as

V AFTER ONE YEAR=(2*0.95)/0.20=9.5

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