Stocks A and B have the following data. Assuming the stock market is efficient a

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?


A B
Required return 10% 12%
Market price $25 $40
Expected growth 7% 9%

These two stocks should have the same price.
These two stocks must have the same dividend yield.
These two stocks should have the same expected return.
These two stocks must have the same expected capital gains yield.
These two stocks must have the same expected year-end dividend.

Explanation / Answer

Stock A Dividend = $25 *(0.10 - 0.07) = $.75 Stock B Dividend = $40 *(0.12 - 0.09) = $1.2 Dividend yield = dividend/ stock price stock A = $.75/$25 = .03 or 3% Stock B = $1.2/$40 = .03 or 3% These two stocks must have the same dividend yield.

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