Question

16. Which of the following statements is CORRECT? (2pts)

a. The constant growth model takes into consideration the capital gains investors expect to earn on a stock

b. It is appropriate to use the constant growth model to estimate a stock's value even if its growth rate is never expected to become constant.

c. If a stock has a required rate of return ke = 12%, and if its dividend is expected to grow at a constant rate of 5%, this implies that the stock's dividend yield is also 5%.

d. The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

e. Two firms with the same expected dividend and growth rates must also have the same stock price.

Answer 1

16.The correct option is option A. The constant growth model takes into consideration the capital gains an investor expects to earn on a stock.

b. The constant growth model, can only be applied when the growth rate is constant.

c. Re = d1/po + g

12% = d1/po + 5%

So, the dividend yield shall be 7% .

d. The price of the stock is the present value of all the dividends , discounted at the required rate of return and not the growth rate.

e. No, it is not true, the required rate of return may be different, which can lead to  the different stock prices.