Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT?

Question

Stock X has the following data.Assuming the stock market is efficient and the stock is in equilibrium,which of the following statements is CORRECT?  ​

Quizplus · Accepted Answer

According to the dividend discount model, the required return on a stock is equal to its expected dividend yield plus its expected capital gains yield. Since the stock's expected dividend yield and growth rate are equal, it means that the stock's expected capital gains yield is also 5% (since growth rate = retention ratio × return on equity, and retention ratio = 1 - dividend payout ratio). Therefore, the required return on the stock is 5% + 5% = 10%. None of the other options can be determined from the given data.

Stock X Has the Following Data