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Stocks A and B have the following data
Stocks A and B have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?
|
A |
B |
|
| Price |
$25 |
$40 |
| Expected growth |
8% |
9% |
| Expected return |
10% |
12% |
| a. |
A's expected dividend is $0.75 and B's expected dividend is $1.20. |
|
| b. |
A's expected dividend is $0.50. |
|
| c. |
The two stocks could not be in equilibrium with the numbers given in the question. |
|
| d. |
B's expected dividend is $0.75. |
|
| e. |
The two stocks should have the same expected dividend. |
Expert Solution
Share price = Dividend for next period / (Return - growth)
25 = D/ (10%-8%)
25 = D/0.02
(25*0.02) = D
0.5 = Dividend for A
Share price = Dividend for next period / (Return - growth)
40 = D* / (12%-9%)
40 = D / 0.03
40*0.03 = D
1.2 = Dividend for B
The Correct statement is B as the dividend for A is 0.50 and dividend for B is 1.2
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