Which of the following statements is CORRECT,assuming stocks are in equilibrium?
A)The dividend yield on a constant growth stock must equal its expected total return minus its expected capital gains yield.
B)Assume that the required return on a given stock is 13%. If the stock's dividend is growing at a constant rate of 5%, its expected dividend yield is 5% as well.
C)A stock's dividend yield can never exceed its expected growth rate.
D)A required condition for one to use the constant growth model is that the stock's expected growth rate exceeds its required rate of return.
E)Other things held constant, the higher a company's beta coefficient, the lower its required rate of return.

Question

Quizplus · Accepted Answer

According to the constant growth model, the dividend yield of a constant growth stock must equal its expected total return minus its expected capital gains yield. This is because the expected total return is the sum of the expected dividend yield and expected capital gains yield. Therefore, statement A is correct. Statement B is incorrect because the expected dividend yield will be lower than the growth rate due to the compounding effect of reinvesting dividends. Statement C is incorrect because the dividend yield can be higher than the growth rate if the stock price is low enough. Statement D is incorrect because the expected growth rate should be lower than the required rate of return for the constant growth model to work. Statement E is incorrect because the higher a company's beta coefficient, the higher its required rate of return, not lower.

Which of the Following Statements Is CORRECT,assuming Stocks Are in Equilibrium