Answer to Question #6132 in Economics of Enterprise for Lamarcus Streeter

Question

2. 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 $25
Expected growth (constant) 10% 5%
Required return 15% 15%

a. Stock A's expected dividend at t = 1 is only half that of Stock B.
b. Stock A has a higher dividend yield than Stock B.
c. Currently the two stocks have the same price, but over time Stock B's price will pass that of A.
d. Since Stock A’s growth rate is twice that of Stock B, Stock A’s future dividends will always be twice as high as Stock B’s.
e. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.

Answer 1

c is correct answer. Currently the two stocks have the same price, but over time
Stock B's price will pass that of A because expected growth of Stock A's is
higher then Stock B's, so over the time price of Srock B will be less then A's