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bekas [8.4K]
3 years ago
7

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 sto

ck 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.
Business
1 answer:
Sveta_85 [38]3 years ago
8 0

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.

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