A 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%,then which of the following statements is CORRECT?

Question

Quizplus · Accepted Answer

Note that P₀ = $2/(0.15 + 0.05)= $10.That price is expected to decline by 5% each year,so P₁ must be $10(0.95)= $9.50.Therefore,answer e is correct,while all the others are false.

A Stock Is Expected to Pay a Year-End Dividend of $2.00,i.e