Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
$\begin{array}{lcc}
& \mathrm { A } & \mathrm { B } \
\text { Beta } & 1.10 & 0.90 \
\text { Constant growth rate } & 7.00 \% & 7.00 \%
\end{array}$
A) stock a must have a higher dividend yield than stock b.
B) stock b's dividend yield equals its expected dividend growth rate.
C) stock b must have the higher required return.
D) stock b could have the higher expected return.
E) stock a must have a higher stock price than stock b.

Question

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
$\begin{array}{lcc}
& \mathrm { A } & \mathrm { B }  \
\text { Beta } & 1.10 & 0.90 \
\text { Constant growth rate } & 7.00 \% & 7.00 \%
\end{array}$
A) stock a must have a higher dividend yield than stock b.
B) stock b's dividend yield equals its expected dividend growth rate.
C) stock b must have the higher required return.
D) stock b could have the higher expected return.
E) stock a must have a higher stock price than stock b.

Quizplus · Accepted Answer

Statement a is true, because Stock A has a higher required return but the stocks have the same growth rate, so Stock A must have the higher dividend yield. Here are some calculations to demonstrate the point.
 $\begin{array}{llllllll}
&rRF&&beta&&RPM&&rstock\
\hline \mathrm{A} & 6.40 \% & + & 1.10 & \times & 6.00 \% & = & 13.00 \% \
B & 6.40 \% & + & 0.90 & \times & 6.00 \% & = & 11.80 \%\
\
\end{array}$
$\begin{array}{lllllll}
&Div. Yld.&&g&&rstock\
\hline\mathrm{A} & \mathrm{D}_{1} / \mathrm{P}_{0}+7.00 \% & + & =13.00 \% & &\mathrm{D}_{1} / \mathrm{P}_{0}=\mathrm{r}-\mathrm{g}=6.00 \% \
\mathrm{~B} & \mathrm{D}_{1} / \mathrm{P}_{0}+7.00 \% & + & 11.80 \% & &\mathrm{D}_{1} / \mathrm{P}_{0}=\mathrm{r}-\mathrm{g}=4.80 \%
\end{array}$

Stocks a and B Have the Following Data AB Beta 1.100.90 Constant growth rate 7.00%7.00%\begin{array}{lcc}& \mathrm { A } & \mathrm { B } \\\text { Beta } & 1.10 & 0.90 \\\text { Constant growth rate } & 7.00 \% & 7.00 \%\end{array} Beta Constant growth rate ​A1.107.00%​B0.907.00%​

Stocks a and B Have the Following Data $\begin{array}{lcc}& \mathrm { A } & \mathrm { B } \\\text { Beta } & 1.10 & 0.90 \\\text { Constant growth rate } & 7.00 \% & 7.00 \%\end{array}$