1. Nick’s Enchiladas Incorporated has preferred stock outstanding that pays a dividend of $5 at the end of each year. The preferred stock sells for $35 a share. What is the stock’s required rate of return? Round the answer to two decimal places. % 2. A stock is expected to pay a year-end dividend of $2.00, i.e., D1 = $2.00. The dividend is expected to decline at a rate of 5% a year forever (g = −5%). If the company is in equilibrium and its expected and required rate of return is 15%, which of the following statements is CORRECT?
a. The company’s dividend yield 5 years from now is expected to be 10%. b. The company’s current stock price is $20.
c. The company’s expected capital gains yield is 5%.
d. The constant growth model cannot be used because the growth rate is negative.
e. The company’s expected stock price at the beginning of next year is $9.50.