215k views
2 votes
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.

1 Answer

5 votes

Answer:

d. The stock's price one year from now is expected to be 5% above the current price

Step-by-step explanation:

From the dividend grow model we got that price of a share is:


(divends_1)/(return-growth) = Intrinsic \: Value_1

next year the dividend will be higher in proportion to dividend growth:


\frac{divends_1}(1+g){return-growth} = Intrinsic \: Value_1

Thus, we can rearrenge as:


(divends_1)/(return-growth) (1+g)= Intrinsic \: Value_2


Intrinsic \: Value_1 (1+g)= Intrinsic \: Value_2

This makes d statement correct.

User Lolero
by
8.1k points

No related questions found

Welcome to QAmmunity.org, where you can ask questions and receive answers from other members of our community.

9.4m questions

12.2m answers

Categories