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 stock's dividend yield is 5%.b. The price of the stock is expected to decline in the future.c. The stock's required return must be equal to or less than 5%.d. The stock's price one year from now is expected to be 5% above the current price.e. The expected return on the stock is 5% a year.

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TomShelby TomShelby · Answer 1 · 2019-11-05T05:02:49+01:00

Answer:

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

Explanation:

From the dividend grow model we got that price of a share is:

[tex]\frac{divends_1}{return-growth} = Intrinsic \: Value_1[/tex]

next year the dividend will be higher in proportion to dividend growth:

[tex]\frac{divends_1}(1+g){return-growth} = Intrinsic \: Value_1[/tex]

Thus, we can rearrenge as:

[tex]\frac{divends_1}{return-growth} (1+g)= Intrinsic \: Value_2[/tex]

[tex]Intrinsic \: Value_1 (1+g)= Intrinsic \: Value_2[/tex]

This makes d statement correct.