Stock X has a required return of 12% and a dividend yield of 5%,and its dividend is expected to grow at a constant rate forever.Stock Y has a required return of 10%,a dividend yield of 3%,and its dividend is expected to grow at a constant rate forever.Both stocks currently sell for $25 per share.Which of the following statements is correct?

Question

Quizplus · Accepted Answer

To compare the dividend per share between stocks, we need to find their respective dividends per share. Let D1 be the dividend per share for next year. Using the dividend yield formula, D1 = dividend yield x price. 
For stock X, D1 = 0.05 x $25 = $1.25.
For stock Y, D1 = 0.03 x $25 = $0.75.
Therefore, stock X pays a higher dividend per share than stock Y. 
We cannot determine which stock has a higher expected capital gains yield as we don't have information on their expected price appreciation. We also cannot compare their growth rates as we don't have the data for their growth rates.

Stock X Has a Required Return of 12% and a Dividend