Question

Stock A has a required return of 10% and a price of $25, and its dividend is expected to grow at a constant rate of 7% per year. Stock B has a required return of 12% and a price of $40, and its dividend is expected to grow at a constant rate of 9% per year. Which of the following statements is correct?

a. If the stock market were efficient, these two stocks would have the same expected return.
b. The two stocks have the same dividend yield.
c. The two stocks have the same expected capital gains yield.
d. If the stock market were efficient, these two stocks would have the same price.

Answer 1

Option B is the correct answer - the two stocks have the same dividend yield.

Step-by-step explanation:

Total Return = Dividend Yield+ Capital Gain Yield.

Thus, dividend yield = Total Return - Capital Gain Yield.

The dividend yield for stock A = 10-7 = 3%

The dividend yield for stock B = 12-9 = 3%

Therefore it is proved that the dividend yields of both the stocks are the same.

So, option B is the correct answer.

Answer 2

b. The two stocks have the same dividend yield .

Step-by-step explanation:

Total Return = Dividend Yield+ Capital Gain Yield

For Stock A

Dividend Yield = 10-7 = 3%

For Stock B

Dividend Yield = 12-9 = 3%

Hence it is proved that the dividend yields of both the stocks are same.