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
Price $25 $25
Expected growth (constant) 10% 5%
Required return 15% 15%

a. Stock A's expected dividend at t = 1 is only half that of Stock B.
b. Stock A has a higher dividend yield than Stock B.
c. Currently the two stocks have the same price, but over time Stock B's price will pass that of A.
d. Since Stock A’s growth rate is twice that of Stock B, Stock A’s future dividends will always be twice as high as Stock B’s.
e. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.

Explanation / Answer

Remember, the constant growth formula is P=Div / (R-G) For Stock A you get: 25 = Dividend / (.15-.1) For Stock B you get: 25 = Dividend / (.15-.05) You can find the Dividend for A is 1.25 and the Dividend for B is 2.50. You can take that information and find out which answer choice is correct!

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