Stock X is expected to pay a dividend of $3.00 at the end of the year, i.e., D1

Question

Stock X is expected to pay a dividend of $3.00 at the end of the year, i.e., D1 = $3.00, and that dividend is expected to grow at a constant rate of 6% a year. The stock currently trades at a price of $50 a share. Assume that the stock is in equilibrium, that is, the stock’s price equals its intrinsic value. Which of the following statements is CORRECT?

a The stock’s required return is 10%.

b. The stock’s expected dividend yield and growth rate are equal.

c. The stock’s expected dividend yield is 5%.

d. The stock’s expected capital gains yield is 5%.

Explanation / Answer

b. The stock’s expected dividend yield and growth rate are equal.

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