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}{lcc}
& \mathrm{A}& \underline{\mathrm{B}} \
\text { Required return } & 10 \% & 12 \%\
\text { Market price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7\%& 9\% \

\end{array}$
A) these two stocks must have the same dividend yield.
B) these two stocks should have the same expected return.
C) these two stocks must have the same expected capital gains yield.
D) these two stocks must have the same expected year-end dividend.
E) these two stocks should have the same price.

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}{lcc}
& \mathrm{A}& \underline{\mathrm{B}} \
\text { Required return } & 10 \% & 12 \%\
\text { Market price }  & \$ 25 & \$ 40 \
\text { Expected growth } & 7\%& 9\% \

\end{array}$
A) these two stocks must have the same dividend yield.
B) these two stocks should have the same expected return.
C) these two stocks must have the same expected capital gains yield.
D) these two stocks must have the same expected year-end dividend.
E) these two stocks should have the same price.

Quizplus · Accepted Answer

The following calculations show that answer a is correct. The others are all wrong.
 $\begin{array}{lcc}
& \underline{A} & \underline{B} \
\text { Expected return }  & \underline{10 \%} & 12 \% \
\text { Expected growth } & \underline{7\%} & 9 \% \
\text { Dividend yield } & \underline{\underline{3 \%}} & \underline{\underline{3 \%}} \
\end{array}$

Stocks a and B Have the Following Data A) These Two Stocks Must Have the Same Dividend Yield