Question

Stocks X and Y have the following data. The market risk premium is 5.0% and the risk-free rate is 4.6%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? X Y Beta 1.50 0.50 Constant growth rate 6.00% 6.00% a. Both stocks have the same dividend yield. b. Stock X has the higher dividend yield. c. Stock Y has the higher expected return.

Answer 1

Answer:

b. Stock X has the higher dividend yield.

Explanation:

We solve for the cost of equity of each stock using CAMP then, with the gordon model we determinate the price ofthe share expressed in Dividends.

Stock X

$Ke= r_f + \beta (r_m-r_f)$

risk free = 0.046

market rate = 0.09

premium market = (market rate - risk free) 0.05

beta(non diversifiable risk) = 1.5

$Ke= 0.046 + 1.5 (0.05)$

Ke 0.12100

Dividend grow model:

D/(r-g) = Value of the share

0.121 - 0.06 = 0.061

D/0.061 = 16.39D

Stock Y

$Ke= r_f + \beta (r_m-r_f)$

risk free = 0.046

market rate = 0.09

premium market = (market rate - risk free) 0.05

beta(non diversifiable risk) = 0.5

$Ke= 0.046 + 0.5 (0.05)$

Ke 0.07100

Dividend grow model:

D/(r-g) = Value of the share

0.071 - 0.06 = 0.011

D / 0.011 = 90.90D

The stock X is value 16.39 times his dividends

while stock Y is valued 90.90 times his dividends

Thus, being Dividend Yield the Dividend per share over the price of the share it will be higher on stock X than stock Y