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? $$\begin{array} { l c c }
& \mathrm { A } & \mathrm { B } \
\text { Required return } & 10 \% & 12 \% \
\text { Market price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \%
\end{array}$$
A) These two stocks must have the same dividend yield.
B) These two stocks should have the same expected return.
C) These two stocks must have the same expected capital gains yield.
D) These two stocks must have the same expected year-end dividend.
E) These two stocks should have the same price.

Question

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? $$\begin{array} { l c c } 
& \mathrm { A } & \mathrm { B } \
\text { Required return } & 10 \% & 12 \% \
\text { Market price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \%
\end{array}$$
A) These two stocks must have the same dividend yield.
B) These two stocks should have the same expected return.
C) These two stocks must have the same expected capital gains yield.
D) These two stocks must have the same expected year-end dividend.
E) These two stocks should have the same price.

Quizplus · Accepted Answer

In an efficient market, the required return is the sum of the dividend yield and the expected growth rate. Since the required returns and expected growth rates differ, the dividend yields must adjust to ensure the required returns are met, implying the dividend yields are equal.

Stocks a and B Have the Following Data A) These Two Stocks Must Have the Same Dividend Yield