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

We can use the constant growth model to find the expected dividend for each stock:

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

For stock B: 
0.12 = (D / $40) + 0.09
D = $1.20

Therefore, A's expected dividend is $0.75 and B's expected dividend is $1.20, so the correct answer is D. We cannot determine if the two stocks are in equilibrium based on this information alone.

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