Stocks X and Y sell at the same price. Stock X has a required return of 12% while Y's required return is 10%. Stock X's dividend is expected to grow at a constant rate of 6% a year, while Stock Y's dividend is expected to grow at a constant rate of 4%. If the market is in equilibrium so that expected returns equal required returns, which of the following statements is correct?
A) Stock X has a higher dividend yield than Stock Y.
B) Stock Y has a higher dividend yield than Stock X.
C) One year from now, Stock X's price is expected to be higher than Stock Y's price.
D) Stock Y has a higher capital gains yield.
Correct Answer:
Verified
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