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Quizzes (Part II) - 1.Question A stock expects to pay a...

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1. Question: A stock expects to pay a year-end dividend of $2 a share (i.e., D1 = $2; assume that last year's dividend has already been paid). The dividend is expected to fall 5% a year forever (i.e., g = -5%). The company's expected and required rate of return is 15%. Which of the following statements is most correct? Your Answer: A. The company's stock price is $10. B. The company's expected dividend yield 5 years from now will be 20%. C. The company's stock price 5 years from now is expected to be $7.74. D. Both answers B and C are correct. E. All of the above answers are correct. CORRE CT Instructor Explanation:Statement E is the correct choice; all the statements are correct. Statement A is correct; Po = $2/(.15+.05) = $10. Statement B is correct; Div yields = D6/P5 or ($2(.95)to the 5th power) = $1.547562/$7.74 = 20%. Statement C is correct; ($10(.95)to the 5th power) = $7.74. Points Received: 6 of 6 Comments: 2. Question: Which of the following statements is most correct? Your Answer: CORRECT ANSWER
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