Question

Stock A has a required return of 9.00%, while Stock B has a required return of 6.00%. Which of the following statements is CORRECT?

a. If the market is in equilibrium, and if Stock A has the lower expected dividend yield, then it must have the higher expected growth rate.

b. If Stock A and Stock B have the same dividend yield, then Stock A must have a lower expected capital gains yield than Stock B.

c. If Stock A and Stock B have the same current dividend and the same expected dividend growth rate, then Stock A must sell for a higher price.

d. Stock A must have a higher dividend yield than Stock B.

e. The stocks must sell for the same price.

Answer 1

Stock A has a required return of 9.00%, while Stock B has a required return of 6.00%. The following statement which is correct:

Ans- Option D

As Total Return(or Required Return) = Capital gain Yield + Dividend Yield

Since, Stock A has higher Required return than its must have higher dividend yield than Stock B.

Other options being Incorrect,

-If Stock A and Stock B have the same dividend yield, then Stock A must have a Higher expected capital gains yield than Stock B

- If Stock A and Stock B have the same current dividend and the same expected dividend growth rate, then Stock A must sell for a Lower price.

_ the price of stock A & B cannot be determined