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? $$\begin{array} { l c c }
& \mathrm { A } & \mathrm { B } \
\text { Price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \% \
\text { Expected return } & 10 \% & 12 \%
\end{array}$$
A) The two stocks could not be in equilibrium with the numbers given in the question.
B) A's expected dividend is $0.50.
C) B's expected dividend is $0.75.
D) A's expected dividend is $0.75 and B's expected dividend is $1.20.
E) The two stocks should have the same expected dividend.

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? $$\begin{array} { l c c } 
& \mathrm { A } & \mathrm { B } \
\text { Price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \% \
\text { Expected return } & 10 \% & 12 \%
\end{array}$$
A) The two stocks could not be in equilibrium with the numbers given in the question.
B) A's expected dividend is $0.50.
C) B's expected dividend is $0.75.
D) A's expected dividend is $0.75 and B's expected dividend is $1.20.
E) The two stocks should have the same expected dividend.

Quizplus · Accepted Answer

In equilibrium, the expected return equals the dividend yield plus the growth rate. For Stock A: 10% = Dividend/25 + 7%, so Dividend = $0.75. For Stock B: 12% = Dividend/40 + 9%, so Dividend = $1.20.

Stocks a and B Have the Following Data A) the Two Stocks Could Not Be in Equilibrium with Market