Question

The expected rate of return on a constant growth stock is equal to the ____ plus its _____. Select one: a. risk-free rate; inflation premium b. risk-free rate; expected growth rate c. dividend yield; risk premium d. dividend yield; expected growth rate

Answer 1

The correct answer is letter "D": dividend yield; expected growth rate.

Step-by-step explanation:

Constant growth stocks are dividends expected to provide a constant rate for long, undetermined periods. This implies the stock's dividend yield and projected capital gains are constant. Under these parameters, the expected rate of return of this type of stock is calculated by adding the expected dividend yield to the expected growth rate.