Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
$\begin{array} { l c c }
& \mathrm { A } & \underline { 3 } \
\text { Price } &\$25&\$25\
\text { Expected growth (constant) } & 10 \% & 5 \% \
\text { Required retun } & 15 \% & 15 \%\

\end{array}$
A) stock a has a higher dividend yield than stock b.
B) currently the two stocks have the same price, but over time stock b's price will pass that of a.
C) since stock a's growth rate is twice that of stock b, stock a's future dividends will always be twice as high as stock b's.
D) the two stocks should not sell at the same price. if their prices are equal, then a disequilibrium must exist.
E) stock a's expected dividend at t = 1 is only half that of stock b.

Question

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
 $\begin{array} { l c c } 
& \mathrm { A }  & \underline { 3 } \
\text { Price } &\$25&\$25\
\text { Expected growth (constant) } & 10 \% & 5 \% \
\text { Required retun } & 15 \% & 15 \%\

\end{array}$
A) stock a has a higher dividend yield than stock b.
B) currently the two stocks have the same price, but over time stock b's price will pass that of a.
C) since stock a's growth rate is twice that of stock b, stock a's future dividends will always be twice as high as stock b's.
D) the two stocks should not sell at the same price. if their prices are equal, then a disequilibrium must exist.
E) stock a's expected dividend at t = 1 is only half that of stock b.

Quizplus · Accepted Answer

Statement e is correct, because if both stocks have the same price and the same required return, and A's growth rate is twice that of B, then A's dividend and dividend yield must be half that of B. This point is illustrated with the following example.
 $\begin{array}{lcc}
 &\mathrm{A} & \mathrm{B}\
\text { Price }& 25\$ & 25 \$\
\mathrm{~g} & 10 \% & 5 \% \
1 & 15 \% & 15 \% \
\text { Div. Yield }=r-\mathrm{g}= & 5 \% & 10 \% \
\mathrm{D}_{1}=\mathrm{P}(\text { Div Yield })= & \$ 1.25 & \$ 2.50
\end{array}$

Stocks a and B Have the Following Data A) Stock a Has a Higher Dividend Yield Than Stock