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:

Express Warranty

An explicitly stated guarantee by a seller regarding the condition or quality of a product.

Warranty of Title

A guarantee provided by a seller to a buyer that the seller has the right to transfer ownership and no undisclosed encumbrances exist.

Particular Purpose

A specific objective or intended use for which something is designated or implemented.

Implied Warranty of Merchantability

A legal assumption that the goods sold meet certain quality standards, including that they are reasonably fit for their ordinary purpose.