Suppose that company ABC\'s last dividend was $5 per share, and company DEF\'s l

Question

Suppose that company ABC's last dividend was $5 per share, and company DEF's last dividend was $10 per share. Analysts expect that company ABC's dividend will grow at a constant rate of 2%, and company DEF's dividend will grow at a constant rate of 3%. Which of the following must be true?

a) The stock price of company ABC is higher than that of company DEF

b) The stock price of company DEF is higher than that of company ABC

c) Company DEF's growth rate must decline at some point.

d) Given this information, no conclusion can be reached about the prices of company ABC and DEF.

Explanation / Answer

d) Given this information, no conclusion can be reached about the prices of company ABC and DEF

because the price of a share can be calculated by using the above formula

P0 = D1/ke-g

Here D1 can be calculated as follows D0(1+g)

here dividend(D0) is given ang growth rate(g) is given but cost of equity(Ke) of both the companies is not given so we cannot calculate the price of stock of both companies.

Related Questions

Navigate

• Browse (All)
• Browse S
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.