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., 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).
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., 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).
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text: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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