Stocks a and B Have the Following Data $\begin{array}{lcc}& \mathrm { A } & \mathrm { B } \\\text { Beta } & 1.10 & 0.90 \\\text { Constant growth rate } & 7.00 \% & 7.00 \%\end{array}$

question 40

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?
$\begin{array}{lcc}& \mathrm { A } & \mathrm { B } \\\text { Beta } & 1.10 & 0.90 \\\text { Constant growth rate } & 7.00 \% & 7.00 \%\end{array}$

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

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Definitions:

Taxable Income

The amount of income subject to taxes, determined by subtracting deductions and exemptions from gross income.

Marginal Tax Rate

The percentage of tax applied to your income for each tax bracket in which you qualify, essentially the rate applied to the last dollar of the taxpayer's income.

Federal Income Tax

An annual fee collected by the United States federal government from individuals, corporations, trusts, and other legal entities' earnings.

Average Tax Rate

The ratio of the total amount of taxes paid to the total tax base (income, expenditure, or asset), representing the overall burden of the tax.