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

Answer:

d. The stock's price one year from now is expected to be 5% above the current price

Explanation:

From the dividend grow model we got that price of a share is:

$\frac{divends_1}{return-growth} = Intrinsic \: Value_1$

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:

$\frac{divends_1}{return-growth} (1+g)= Intrinsic \: Value_2$

$Intrinsic \: Value_1 (1+g)= Intrinsic \: Value_2$

This makes d statement correct.