1. If a stock’s dividend is expected to grow at a constant rate of 5% a year, which of the following statements is CORRECT? The stock is in equilibrium.

a.   The expected return on the stock is 5% a year.

b.   The stock’s dividend yield is 5%.

c.   The price of the stock is expected to decline in the future.

d.   The stock’s required return must be equal to or less than 5%.

e.   The stock’s price one year from now is expected to be 5% above the current price.

2. A stock is expected to pay a year-end dividend of $2.00 a share (D1 = $2.00). The dividend is expected to decline at a rate of 5% a year constantly (g = -5%). The company’s 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 company’s stock price next year is expected to be $9.50.

d.   The company’s expected capital gains yield is 15%.

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