Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return.Which of the following statements is CORRECT?
A) Stock B must have a higher dividend yield than Stock A.
B) Stock A must have a higher dividend yield than Stock B.
C) If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's.
D) Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B.
E) If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's.

Question

Quizplus · Accepted Answer

Given that Stock A has a higher required rate of return but both stocks have the same price and are in equilibrium, if Stock A has a lower dividend yield than Stock B, it must compensate with a higher expected capital gains yield to meet its higher required rate of return.

Stocks a and B Have the Same Price and Are