stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00 The dividend is expected to decline at a rate of 5% a year 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 dividend yield 5 years from now is expected to be 10%.
B) The constant growth model cannot be used because the growth rate is negative.
C) The company's expected capital gains yield is 5%.
D) The company's expected stock price at the beginning of next year is $9.50.
E) The company's current stock price is $20.

Question

Quizplus · Accepted Answer

The constant growth model can be used to value the stock even though the growth rate is negative. The expected capital gains yield is equal to the expected rate of return minus the dividend yield. The dividend yield 5 years from now is expected to be 10%. The current stock price is $20.

Stock Is Expected to Pay a Year-End Dividend of $2