Stock A has a beta of 1.1 and Stock B has a beta of 0.9. The market risk premium
ID: 2737244 • Letter: S
Question
Stock A has a beta of 1.1 and Stock B has a beta of 0.9. The market risk premium is 6%, and the risk-free rate is 6.3%. Both stocks have a constant dividend growth rate of 7% a year. If the market is in equilibrium, which of the following statements is CORRECT?
Stock A must have a higher dividend yield than Stock B.
Stock A must have a higher stock price than Stock B.
Stock B's dividend yield equals its expected dividend growth rate.
Stock B must have the higher required return.
Stock B could have the higher expected return.
Stock A must have a higher dividend yield than Stock B.
Stock A must have a higher stock price than Stock B.
Stock B's dividend yield equals its expected dividend growth rate.
Stock B must have the higher required return.
Stock B could have the higher expected return.
Explanation / Answer
Stock A must have a higher dividend yield than Stock B.
Working notes for the above answer is as uderr
Under CAPM
Ri = Rf +B (Rm-Rf)
A
=6.3% +1.1 (6%)
=6.3+6.6%
=12.9%
B
=6.3%+0.9(6%)
=6.3%+5.4%
=11.7%
So here in this case we could say that,
Stock A must have a higher dividend yield than Stock B.
Stock A must have a higher dividend yield than Stock B.
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