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

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TomShelby

Answer:

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

Explanation:

Under gordon model:

[tex]\frac{divends}{return-growth} = Intrinsic \: Value[/tex]

If we calculate the value of the stock for the year after that:

[tex]\frac{divends x (1 + growth)}{return-growth} = Intrinsic \: Value[/tex]

to calculate the value of the increase we divide next year over current year.

[tex]\frac{divends(1+growth)}{return-growth} \div \frac{divends}{return-growth}\\\\\frac{divends(1+growth)}{return-growth} \times\frac{return-growth}{divends}\\\\\frac{divends(1+growth)}{divends}= 1+ growth[/tex]

We have demostrate that next year stock should increase by 1 + growth so statement c is correct.

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