Stocks X and Y Sell at the Same Price

question 64

Multiple Choice

Stocks X and Y sell at the same price. Stock X has a required return of 12% while Y's required return is 10%. Stock X's dividend is expected to grow at a constant rate of 6% a year, while Stock Y's dividend is expected to grow at a constant rate of 4%. If the market is in equilibrium so that expected returns equal required returns, which of the following statements is correct?

• A) Stock X has a higher dividend yield than Stock Y.
• B) Stock Y has a higher dividend yield than Stock X.
• C) One year from now, Stock X's price is expected to be higher than Stock Y's price.
• D) Stock Y has a higher capital gains yield.

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Definitions:

Parallel Lines

Lines in a plane that never meet, no matter how far they are extended.

Ambiguous Figure

A visual image that can be understood or interpreted in more than one distinct way.

Interposition

A visual cue in depth perception where one object partially blocks or covers another, indicating the former is closer to the observer.

Texture Gradient

A visual cue in depth perception where the density of texture increases with distance, aiding in the perception of depth.