1. A stock is expectedto pay a year-end dividend of $2.00,i.e., D 1 = $2.00.The

Question

1.        A stock is expectedto pay a year-enddividend of $2.00,i.e., D1 = $2.00.The dividend is expected to decline at a rate of 5% ayear forever (g = -5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?

a.        The company's dividendyield 5 years from now is expectedto be 10%.

b.       The constant growth model cannot be used because the growth rate is negative.

c.        The company's expectedcapital gains yield is 5%.

d.       The company'sexpected stock price at the beginningof next year is $9.50.

e.        The company's currentstock price is $20.

Explanation / Answer

e.        The company's currentstock price is $20.

using the formula D1/re-g where d1 =2, re =15% n g =5%

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