1. A stock is expected to pay a year-end dividend of $2.00 per share. The dividend is expected to grow at a constant rate of 5%, and the stock has a required return of 9%. What is the expected price of the stock five years from today?

2.

Which of the following statements is correct?

1. A) The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years.

2. B) If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stocks dividend yield is also 5%.

3. C) The stock valuation model, P0 = D1/(rs - g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate.

4. D) The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate.

3. Preferred stock is a hybrid--a sort of cross between a common stock and a bond--in the sense that it pays dividends that normally increase annually like a stock but its payments are contractually guaranteed like interest on a bond. A) True

B) False

4. Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?

1. A) If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock Bs.

2. B) Stock B must have a higher dividend yield than Stock A.

3. C) Stock A must have a higher dividend yield than Stock B.

4. D) If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock Bs.

5. A share of common stock just paid a dividend of $1.00. If the expected long-run growth rate for this stock is 5.4%, and if investors' required rate of return is 11.4%, what is the stock price?

6. If D1 = $1.50, g (which is constant) = 6.5%, and P0 = $56,what is the stocks expected capital gains yield for the coming year?