Stocks A and B have the same price and are in equilibrium, but Stock A has the h

Question

Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT? a Stock 8 must haereer didend yield than Stock A b. If Stock A has a smaller dividend yield than Stock B, then its expected capital gains yield must equal O c. If Stock A has a greater dividend yield than Stock B, then its expected capital gains yield must be O d. Stock A must provide either a greater dividend yield, a larger capital gains yield, or both compared to Stock B's. smaller than Stock B's. Stock B. e. Stock B must offer a smaller capital gains yield than Stock A.

Explanation / Answer

Answer:

If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B’s.
Reason:
If the required return for Stock A is higher than that of Stock B, and if the dividend yield for Stock A is lower than Stock B's, the growth rate for Stock A must be higher to offset this.

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