QUESTION 1 Stocks A and B have the following data. Assuming the stock market is

Question

QUESTION 1 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? Price Expected growth Expected return $25 796 10% $40 9% 12% a. The two stocks should have the same expected dividend. D.The two stocks could not be in equilibrium with the numbers given in the question. CA's expected dividend is $0.50. d. B's expected dividend is $0.75 e. A's expected dividend is $0.75 and B's expected dividend is $1.20.

Explanation / Answer

For Stock A Expected return=expected dividend/price +growth .1=D1/25+.07 D1/25=.03 D1= 0.75 For Stock B Expected return=expected dividend/price +growth .12=D1/40+.09 .03=D1/40 D1= 1.2 Correct answer is E

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