26 May Question Stocks A and B have the following data. Assuming
Question
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% |
Answer
| These two stocks must have the same dividend yield. | |
| These two stocks should have the same expected return. | |
| These two stocks must have the same expected capital gains yield. | |
| These two stocks must have the same expected year-end dividend. | |
| These two stocks should have the same price. |
Question 2
Which of the following statements is CORRECT?
Answer
| If a stock has a required rate of return rs = 12% and its dividend is expected to grow at a constant rate of 5%, this implies that the stock’s dividend yield is also 5%. | |
| The stock valuation model, P0 = D1/(rs – g), can be used to value firms whose dividends are expected to decline at a constant rate, i.e., to grow at a negative rate. | |
| The price of a stock is the present value of all expected future dividends, discounted at the dividend growth rate. | |
| The constant growth model cannot be used for a zero growth stock, where the dividend is expected to remain constant over time. | |
| The constant growth model is often appropriate for evaluating start-up companies that do not have a stable history of growth but are expected to reach stable growth within the next few years. |
Question 3
The required returns of Stocks X and Y are rX = 10% and rY = 12%. Which of the following statements is CORRECT?
Answer
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