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Which of the following statements is CORRECT?
a. The constant growth model takes into consideration the capital gains
investors expect to earn on a stock.
b. Two firms with the same expected dividend and growth rates must
also have the same stock price.
c. 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.
d. If a stock has a required rate of return rs = 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%.
e. The price of a stock is the present value of all expected future
dividends, discounted at the dividend growth rate.
2. Stocks A and B have the following data. Assuming the stock market
is efficient and the stocks are in equilibrium, which of the following
statements is CORRECT?
A
B
Price
$25
$25
Expected growth (constant) 10% 5%
Required return
15%
15%
a. Stock A's expected dividend at t = 1 is only half that of Stock B.