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? A B
Price $25 $40
Expected growth 7% 9%
Expected return 10% 12%

Question

Quizplus · Accepted Answer

The expected dividend can be calculated using the dividend discount model, which states that the expected dividend per share is equal to the expected return multiplied by the current stock price minus the expected growth rate. Using this formula for stocks A and B, we get:

For stock A: 
Expected dividend = (10% x $25) - 7% = $2.50 - $1.75 = $0.75

For stock B: 
Expected dividend = (12% x $40) - 9% = $4.80 - $3.60 = $1.20

Therefore, the correct statement is that A's expected dividend is $0.75 and B's expected dividend is $1.20.

Stocks a and B Have the Following Data