help in homework

New User?

Fill This Form To Receive Instant Help

Help in Homework
trustpilot ratings
google ratings


Homework answers / question archive / The required returns of Stocks X and Y are rX = 10% and rY = 12%

The required returns of Stocks X and Y are rX = 10% and rY = 12%

Marketing

The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?

  1. a) If the market is in equilibrium, and if Stock Y has the lower expected dividend yield, then it must have the higher expected growth rate.
  2. b) If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X.
  3. c) if Stock X and Stock Y have the same current dividend and the same expected dividend growth rate, then Stock Y must sell for a higher price.
  4. d) The stocks must sell for the same price.
  5. e) Stock Y must have a higher dividend yield than Stock X.

pur-new-sol

Purchase A New Answer

Custom new solution created by our subject matter experts

GET A QUOTE

Answer Preview

The correct answer is "b) If Stock Y and Stock X have the same dividend yield, then Stock Y must have a lower expected capital gains yield than Stock X."

This is true due to the rationale outlined below.

- Stock Y reflects a higher expected return than Stock X (12% vs. 10%); it is the risker of the two investments.

- Since their dividend yields are the same, some other aspect must make Stock Y riskier than Stock X.

- A lower expected capital gains yield (which means less certain cash flows) is a plausible reason for the risk differential.

Sitejabber (5.0)

BBC (5.0)

Trustpilot (4.9)

Google (5.0)