Which of the following statements is CORRECT? (Hint: Dividend yield (D1/P0) is the difference between Re and g. Calculate Re first by using CAPM.)                                                        A                                     B           Beta                                               1.10                                 0.90 Constant growth rate               7.00%                             7.00%   Stock A must have a higher stock price than Stock B. Stock A must have a higher dividend yield than Stock B. Stock B’s dividend yield equals its expected dividend growth rate. Stock B must have the higher required return. Stock B could have the higher expected return.

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Which of the following statements is CORRECT?

(Hint: Dividend yield (D1/P0) is the difference between Re and g. Calculate Re first by using CAPM.)

 

                                                     A                                     B          

Beta                                               1.10                                 0.90

Constant growth rate               7.00%                             7.00%

 

  1. Stock A must have a higher stock price than Stock B.
  2. Stock A must have a higher dividend yield than Stock B.
  3. Stock B’s dividend yield equals its expected dividend growth rate.
  4. Stock B must have the higher required return.
  5. Stock B could have the higher expected return.
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