5 Stocks A and B have the following data. The market risk premium is 6.0% and th

Question

5

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Select one:

a. Stock A must have a higher stock price than Stock B.

b. Stock B could have the higher expected return.

c. Stock A must have a higher dividend yield than Stock B.

d. Stock B’s dividend yield equals its expected dividend growth rate.

e. Stock B must have the higher required return.

Explanation / Answer

Stock A:

Expected return = 6.4 + (6*1.1) = 13%

Stock B:

Expected return = 6.4 + (6*0.90) = 11.8%

Market Price = D1/ke + g

The stocks have equal growth rate, Stock A must have a higher stock price than Stock B.

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