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

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

Quizplus · Accepted Answer

We can use the dividend discount model to calculate the expected dividend for each stock:

For stock A:
Expected return = (Expected dividend + Expected price appreciation)/Price
0.10 = (Expected dividend + 0.07)/25
Expected dividend = $0.75

For stock B:
Expected return = (Expected dividend + Expected price appreciation)/Price
0.12 = (Expected dividend + 0.09)/40
Expected dividend = $1.20

Therefore, choice D is correct.

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