Assume that a company's dividends are expected to grow at a rate of 25 percent per year for 5 years and then to slow down and to grow at a constant rate of 5 percent thereafter. The required (and expected) total return, rs, is expected to remain constant at 12 percent. Which of the following statements is correct?
a. The dividend yield will be higher in the early years and then will decline as the annual capital gains yield gets larger and larger, other things held constant.
b. Right now, it would be easier (require fewer calculations) to find the dividend yield expected in Year 7 than the dividend yield expected in Year 3.
c. The stock price will grow each year at the same rate as the dividends.
d. The stock price will grow at a different rate each year during the first 5 years, but its average growth rate over this period will be the same as the average growth rate in dividends; that is, the average stock price growth rate will be (25 + 5)/2.
e. Statements a, b, c, and d are all false.