The Required Returns of Stocks X and Y Are RX

question 16

Multiple Choice

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

• A) If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.
• B) If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.
• C) If Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price.
• D) The stocks must sell for the same price.
• E) Stock Y must have a higher dividend yield than Stock X.

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Definitions:

Acceptable Assumptions

The premises that are considered reasonable and are accepted without requiring empirical evidence, often used as a foundational basis in arguments or theories.

Random Sampling

A method of selecting a sample from a population in such a way that each individual has an equal probability of being chosen, ensuring the representativeness of the sample.

Equal Chance

The principle that in a certain process, event, or situation, all outcomes or participants have the same probability or likelihood of occurring or being selected.

Correlation

A statistical measure that expresses the extent to which two variables change together; if the correlation is positive, as one variable increases, the other does as well.