Question

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT? a. The two stocks must have the same dividend per share. b. If one stock has a lower dividend yield, then it must also have a lower dividend growth rate. c. None of the above. d. The two stocks must have the same dividend growth rate. e. If one stock has a lower dividend yield, then it must also have a higher dividend growth rate.

Answer 1

Answer:

e. If one stock has a lower dividend yield, then it must also have a higher dividend growth rate.

Explanation:

Rate of return can be defined as the percentage of interest or dividends earned on money that is invested.

In Financial accounting, a return refers to the amount of profit generated by an investor on an investment over a specific period of time.

Basically, the rate of return which is typically expressed as a percentage of the initial costs of an investment can either be a gain or a loss on an investment. Therefore, a positive rate of return on an investment over a specific period of time, simply means that an investor is making a profit (gains) while a negative rate of return on an investment over a specific period of time, indicates that the investor is running at a loss.

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Thus, if one stock has a lower dividend yield, then it must also have a higher dividend growth rate and vice-versa.

Answer 2

Answer:

e. If one stock has a lower dividend yield, then it must also have a higher dividend growth rate.

Explanation:

Because it is the "Correct Answer"