Which of the following statements is CORRECT? If a stock's dividend is expected to grow at a constant rate of 6% a year, the stock's price one year from now is expected to be 6% below the current price. If two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return, the two stocks must have the same dividend per share. If a stock's dividend is expected to grow at a constant rate of 6% a year, the stock's dividend yield is 6%. For the constant growth model to hold, a firm's cost of equity (rs) needs to be smaller than its constant dividend growth rate (i.e., r, g).

Which of the following statements is CORRECT? If a stock's dividend is expected to grow at a constant rate of 6% a year, the stock's price one year from now is expected to be 6% below the current price. If two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return, the two stocks must have the same dividend per share. If a stock's dividend is expected to grow at a constant rate of 6% a year, the stock's dividend yield is 6%. For the constant growth model to hold, a firm's cost of equity (rs) needs to be smaller than its constant dividend growth rate (i.e., r, g).

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter7: Corporate Valuation And Stock Valuation

Section: Chapter Questions

Problem 14MC

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Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Price Expected growth (constant) Required return X O b) $50 5% 10% Y $50 6% 11% a) Stock Y has a higher dividend yield than Stock X. One year from now, Stock X's price is expected to be higher than Stock Y price. c) Stock X has the higher expected year-end dividend. d) Stock Y has a higher capital gains yield. e) Stock X has a higher dividend vield than Stock V
Which of the following statements is CORRECT? If a stock's dividend is expected to grow at a constant rate of 6% a year, the stock's price one year from now is expected to be 6% below the current price. If two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return, the two stocks must have the same dividend per share. If a stock's dividend is expected to grow at a constant rate of 6% a year, the stock's dividend yield is 6%. For the constant growth model to hold, a firm's cost of equity (re) needs to be smaller than its constant dividend growth rate (i.e., rs< g). From the constant growth model, if the constant dividend growth rate is equal to zero, a firm's share price is equal to the constant dividend divided by the cost of equity (i.e., g=0).
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Suppose that Do = $1.00 and the stock's last closing price is $26.25. It is expected that earnings and dividends will grow at a constant rate of g = 5.00% per year and that the stock's price will grow at this same rate. Let us assume that the stock is fairly priced, that is, it is in equilibrium, and the most appropriate required rate of return is rs = 9.00%. The dividend received in period 1 is D₁ = $1.00 × (1+0.0500) = $1.05 and the estimated intrinsic value in the same period is based on the constant growth model: P₁ = P² Using the same logic, compute the dividends, prices, and the present value of each of the dividends at the end of each period. Price (Dollars) $26.25 PV of dividend at 9.00% (Dollars) Dividend Period (Dollars) 0 $1.00 1.05 1 2 3 4 5 The dividend yield for period 1 is The capital gain yield expected during period 1 is 4.00% O 5.00% and it will 9.00% If it is forecasted that the total return equals 9.00% for the next 5 years, what is the forecasted total return out…
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