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

Statement e is true, because if the required return for Stock A is higher than that of Stock B, and if the dividend yield for Stock A is lower than Stock B's, the growth rate for Stock A must be higher to offset this.

Stocks a and B Have the Same Price and Are