Stocks A and B have the following data. Assuming the stock market is efficient and the...
A B
Required return 10% 12%
Market price $25 $40
Expected growth 7% 9%
These two stocks should have the same price.
These two stocks must have the same dividend yield.
These two stocks should have the same expected return.
These two stocks must have the same expected capital gains yield.
These two stocks must have the same expected year-end dividend.
Homework Answers
Option-B is correct.
Explanation:
Stock A Dividend = $25 *(0.10 - 0.07) = $.75
Stock B Dividend = $40 *(0.12 - 0.09) = $1.2
Dividend yield = dividend/ stock price
stock A = $.75/$25 = .03 or 3%
Stock B = $1.2/$40 = .03 or 3%
These two stocks must have the same dividend yield.
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