Stocks a and B Have the Following Data

question 13

Multiple Choice

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?

• A) Stock A must have a higher stock price than Stock B.
• B) Stock A must have a higher dividend yield than Stock B.
• C) Stock B's dividend yield equals its expected dividend growth rate.
• D) Stock B must have the higher required return.
• E) Stock B could have the higher expected return.

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Definitions:

Elastic Demand

Product or resource demand whose price elasticity of demand is greater than 1, so that any given percentage change in price leads to a larger percentage change in quantity demanded. As a result, quantity demanded is relatively sensitive to (elastic with respect to) price.

Price Elasticity

A measure of how sensitively the quantity demanded of a good or service responds to a change in its price.

Supply

The total amount of a product or service available for purchase at any given time.

Demand

is the quantity of a product or service that consumers are willing and able to purchase at various prices at a given time.