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?
$\begin{array}{lcr}
& \mathrm { A } & \mathrm { B } \
\text { Price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \% \
\text { Expected return } & 10 \% & 12 \%
\end{array}$
A) the two stocks could not be in equilibrium with the numbers given in the question.
B) a's expected dividend is $0.50.
C) b's expected dividend is $0.75.
D) a's expected dividend is $0.75 and b's expected dividend is $1.20.
E) the two stocks should have the same expected dividend.

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?
 $\begin{array}{lcr}
& \mathrm { A } & \mathrm { B }  \
\text { Price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \% \
\text { Expected return } & 10 \% & 12 \%
\end{array}$
A) the two stocks could not be in equilibrium with the numbers given in the question.
B) a's expected dividend is $0.50.
C) b's expected dividend is $0.75.
D) a's expected dividend is $0.75 and b's expected dividend is $1.20.
E) the two stocks should have the same expected dividend.

Quizplus · Accepted Answer

The following calculations show that answer d is correct. The others are all wrong.
 $\begin{array} { l c c } 
&  \mathrm { A }& \underline { \mathrm { B } } \
\text { Price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \% \
\text { Expected return } & 10 \% & 12 \%
\end{array}$ 
A = P0 = D1/(r σ g) = D1 = P0(r) σ P0(g) = $0.75 B = P0 = D1/(r σ g) = D1 = P0(r) σ P0(g) = $1.20

Stocks a and B Have the Following Data A) the Two Stocks Could Not Be in Equilibrium with Stock