Stocks a and B Have the Following Data A) Stock a Has a Higher Dividend Yield Than Stock

question 237

Multiple Choice

Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
$\begin{array}{llr}& \mathrm { A } & \mathrm { B } \\\text { Price } & \$ 25 & \$ 25 \\\text { Expected growth (constant) } & 10 \% & 5 \% \\\text { Required return } & 15 \% & 15 \%\end{array}$

• A) stock a has a higher dividend yield than stock b.
• B) currently the two stocks have the same price, but over time stock b's price will pass that of a.
• C) since stock a's growth rate is twice that of stock b, stock a's future dividends will always be twice as high as stock b's.
• D) the two stocks should not sell at the same price. if their prices are equal, then a disequilibrium must exist.
• E) stock a's expected dividend at t = 1 is only half that of stock b.

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Definitions:

Demand

The desire and ability of consumers to purchase goods or services at a given price.

Supply

The total amount of a specific good or service that is available to consumers in a market at a given time and price.

Equilibrium Price

The price at which the quantity of a good or service demanded equals the quantity supplied, leading to a state of market balance.

Demand

The quantity of a good or service that consumers are willing and able to purchase at various prices.