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.

Question

Quizplus · Accepted Answer

The stock's price is expected to grow at the same rate as its dividends if the dividends are growing at a constant rate and the stock is in equilibrium. This means if the dividend growth rate is 5%, the stock price is also expected to increase by 5% in a year, reflecting the growth in dividends.

If a Stock's Dividend Is Expected to Grow at a Constant