CFA Practice Question

There are 201 practice questions for this study session.

CFA Practice Question

When a stock is expected to earn abnormal returns indefinitely, its dividend yield ______.
A. falls to the cost of capital.
B. is constantly higher than the cost of capital.
C. is constantly lower than the cost of capital.
Explanation: In this case its share price rises and dividend yield falls to the cost of capital. The company's stock trades at a premium to book value.

User Contributed Comments 5

User Comment
saaythong Most companies (in real life) have dividend yields way below the cost of capital. Huge dividend yields above the cost of capital raise big red flags.
dimanyc what's the formula to use or observe the ceoncep here?
bmeisner Is the cost of capital here the WACC or the cost of equity? Anyone know?
aggabad stocks pay dividend=> cost of equity
aggabad but cost of capital would make more sense here because cost of equity is higher than cost of capital (because debt is cheaper than equity)
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