A stock is expected to pay a year-end dividend of $2.00 a share (D1 = $2.00)....
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 rate of 5% a year constantly (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 stock price next year is expected to be $9.50.
d. The company’s expected capital gains yield is 15%.
e. The constant growth model cannot be used because the growth rate is negative.
Homework Answers
c.the company's stock price next year is expected to be $9.50.
current price = D1 / (k- g)
=>$2 / (0.15 - (-0.05))
=>$2 / 0.20
=>$10.00
this year's price is $10.00.
next years price = ($10.00 - 5% decline rate)
=>$9.50.
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