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? $\begin{array}{lrr}
& \underline{\text { A }} &\underline{\text {B}}\
\text { Price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \% \
\text { Expected return } & 10 \% & 12 \%
\end{array}$

A) The two stocks should have the same expected dividend.
B) The two stocks could not be in equilibrium with the numbers given in the question.
C) A's expected dividend is $0.50.
D) B's expected dividend is $0.75.
E) A's expected dividend is $0.75 and B's expected dividend is $1.20.

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? $\begin{array}{lrr}
& \underline{\text { A }} &\underline{\text {B}}\ 
\text { Price } & \$ 25 & \$ 40 \
\text { Expected growth } & 7 \% & 9 \% \
\text { Expected return } & 10 \% & 12 \%
\end{array}$

A) The two stocks should have the same expected dividend.
B) The two stocks could not be in equilibrium with the numbers given in the question.
C) A's expected dividend is $0.50.
D) B's expected dividend is $0.75.
E) A's expected dividend is $0.75 and B's expected dividend is $1.20.

Quizplus · Accepted Answer

In an efficient market, 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 Should Have the Same Expected Dividend