Final answer:
The correct statement is B; it identifies the relationship between an investor's total return from a constant growth stock and the components of dividend yield and capital gains yield. Correct answer is option b.
Step-by-step explanation:
The correct statement is B: The dividend yield on a constant growth stock equals its expected total return less its expected capital gains yield. This statement aligns with the basic principles of stock valuation and the relationship between an investor's total return, dividend yield, and capital gains yield. The other options provided have issues, such as the misapplication of the stock valuation model in C and D, and the illogical situation described in E where a firm's growth rate would exceed its required rate of return, which is not sustainable or typical in the long run.
The concept revolves around the idea that an investor's total return from owning a stock comes from two sources: the dividend payment (dividend yield) and the appreciation in the stock's price (capital gains). Historically, as noted in the provided tables, dividends have played a substantial role in the total return for shareholders, but this return has decreased over time. In the latter decades, capital gains have grown to be a more significant component of the total return.
The stock valuation model mentioned in the options, P0 = D1/(rs - g), is a widely used method where P0 represents the current stock price, D1 is the expected dividend in the next period, rs is the required return on the stock, and g is the expected growth rate of dividends. This model assumes a perpetual growth of dividends at a constant rate and cannot be logically applied to firms with negative growth rates or those whose growth rates are higher than the required return on the stock.