Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?
A) The two stocks must have the same dividend per share.
B) If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
C) If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
D) The two stocks must have the same dividend growth rate.
E) The two stocks must have the same dividend yield.

Question

Two constant growth stocks are in equilibrium, have the same price, and have the same required rate of return. Which of the following statements is CORRECT?
A)	The two stocks must have the same dividend per share.
B)	If one stock has a higher dividend yield, it must also have a lower dividend growth rate.
C)	If one stock has a higher dividend yield, it must also have a higher dividend growth rate.
D)	The two stocks must have the same dividend growth rate.
E)	The two stocks must have the same dividend yield.

Quizplus · Accepted Answer

If two stocks have the same price and required rate of return, a higher dividend yield in one stock implies a lower dividend growth rate to maintain equilibrium.

Two Constant Growth Stocks Are in Equilibrium, Have the Same