Asked by Melis Simge Benli on May 10, 2024
Verified
If a stock's dividend is expected to grow at a constant rate of 5% a year,which of the following statements is correct?
A) The expected return on the stock is 5% a year.
B) The stock's dividend yield is 5%.
C) The stock's required return must be equal to or less than 5%.
D) The stock's price 1 year from now is expected to be 5% above the current price.
Constant Rate
A steady, unchanging rate of growth or decline, often used in the context of compounding interest or economic indicators.
Expected Return
The weighted average of all possible returns for an investment, accounting for the probability of each outcome.
Dividend Yield
The dividend yield represents a financial metric illustrating the annual dividend payments of a company as a proportion of its current stock price.
- Comprehend the fundamental concepts of the dividend discount model in evaluating stock prices.
Verified Answer
AA
Amanda AhlinMay 15, 2024
Final Answer :
D
Explanation :
The stock's price is expected to increase at the same rate as its dividend growth rate in a model where dividends grow at a constant rate, assuming all other factors remain constant. This is because the price of the stock is based on the present value of all future dividends, which are growing at 5% per year.
Learning Objectives
- Comprehend the fundamental concepts of the dividend discount model in evaluating stock prices.