Stock a Has a Required Return of 10% and a Price

question 9

Multiple Choice

Stock A has a required return of 10% and a price of $25,and its dividend is expected to grow at a constant rate of 7% per year.Stock B has a required return of 12% and a price of $40,and its dividend is expected to grow at a constant rate of 9% per year.Which of the following statements is correct?

• A)If the stock market were efficient, these two stocks would have the same price.
• B)The two stocks have the same dividend yield.
• C)If the stock market were efficient, these two stocks would have the same expected return.
• D)The two stocks have the same expected capital gains yield.

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Definitions:

Release

To allow or enable escape from confinement; in legal terms, it can involve the relinquishing of a right or claim.

Hang-gliding

An air sport where a pilot flies a light and non-motorized foot-launchable aircraft called a hang glider.

Responsible

Having an obligation to do something, or having control over or care for someone, as part of one's job or role.

Waiver

The voluntary relinquishment or surrender of a right, claim, or privilege.