Determination of current stock price also capital gains

Reference no: EM1311012

Determination of current stock price also capital gains.

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%, which of the following statements is CORRECT?

a. The company's current stock price is $20.

b. The company's dividend yield 5 years from now is expected to be 10%.

c. The constant growth model cannot be used because the growth rate is negative.

d. The company's expected capital gains yield is 5%.

The company's expected stock price at the beginning of next year is $9.50.

Reference no: EM1311012

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