Homework Answers
Answer xi:
Correct answer is:
e. A constant growth stock whose growth rate is negative will decline in price over time.
Explanation:
A constant (negative) growth stock will have a reducing future dividends over time and hence its price will decline over time.
Hence option e is correct and options c and d are incorrect.
It is not necessary that a non-dividend paying will have declining prices over time since there could be appreciation in share prices due to 100% retention for investment in growth opportunities.
A decrease in growth rate need not necessarily result in decline in share price. Hence statement a and b are also incorrect.
Answer xii:
Correct answer is:
b. Expected rate of return in equal to expected dividend yield plus expected capital gains yield.
Explanation:
Expected total return = Dividend yield + Capital gains yield
Hence option b is correct and options a, c and e are incorrect.
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