Stocks A and B have the following data as attached. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
Stocks A and B have the following data as attached. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
| Stock | A | B |
| Price of stock | $25 | $40 |
| Expected growth of dividend | 7% | 9% |
| Expected rate of return | 10% | 12% |
A) B's expected dividend is $0.75.
B) A's expected dividend is $0.50.
C) B's expected dividend is $0.50.
D) A's expected dividend is $0.75.
E) The two stocks should have the same expected dividend or D1.
Homework Answers
A's expected dividend is computed as shown below:
= Price of stock x ( Expected rate of return - expected growth of dividend)
= $ 25 x ( 0.10 - 0.07)
= $ 0.75
B's expected dividend is computed as shown below:
= Price of stock x ( Expected rate of return - expected growth of dividend)
= $ 40 x ( 0.12 - 0.09 )
= $ 1.20
So, the correct answer is option D i.e. A's expected dividend is $ 0.75
Feel free to ask in case of any query relating to this question
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