Question

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.

Answer 1

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.