Question

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Stock A Market price $25 Required return 10% Expected growth 7% Stock B Market price $40 Required return 12% Expected growth 9%
a. These two stocks must have the same expected capital gains yield.
b. These two stocks must have the same dividend yield.
c. These two stocks should have the same price.
d. These two stocks must have the same expected year-end dividend.

Answer 1

Answer:

c

Explanation:

Answer 2

Answer:

Correct option is (b)

Explanation:

Given:

Stock A:

Market price (P) = $25

Required return (r) = 10%

Growth rate (g) = 7%

Dividend = P (r - g)

                = 25 (0.1 - 0.07)

                = 0.75

Dividend yield = Dividend / Market price

                        = 0.75 / 25

                        = 0.03 or 3%

Stock B:

Market price (P) = $40

Required return (r) = 12%

Growth rate (g) = 9%

Dividend = P (r - g)

                = 40 (0.12 - 0.09)

                = 1.2

Dividend yield = Dividend / Market price

                        = 1.2 / 40

                        = 0.03 or 3%

So, dividend yield is same for both the stocks.