Question

Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

X Y

Price $30 $30

Expected growth (constant) 6% 4%

Required return 12% 10%

1.One year from now, Stock X's price is expected to be higher than Stock Y's price

2.Stock Y has a higher dividend yield than Stock X

3.Stock X has a higher dividend yield than Stock Y

4.Stock X has the higher expected year-end dividend

5.Stock Y has the higher capital gains yield

Answer 1

Answer:

Stock X:
Current Price (P0) = $30
Price in One year from now (P1) = $30 * (1 + 0.06) = $31.80

Dividend Yield = Required Return – Growth Rate
Dividend Yield = 12% - 6%
Dividend Yield = 6%

Year End Dividend = Dividend Yield * Current Price
Year End Dividend = 6% * $30
Year End Dividend = $1.80

Capital Gain Yield = Growth rate = 6%

Stock Y:
Current Price (P0) = $30
Price in One year from now (P1) = $30 * (1 + 0.04) = $31.20

Dividend Yield = Required Return – Growth Rate
Dividend Yield = 10% - 4%
Dividend Yield = 6%

Year End Dividend = Dividend Yield * Current Price
Year End Dividend = 6% * $30
Year End Dividend = $1.80

Capital Gain Yield = Growth rate = 4%

Correct Statement:
One year from now, Stock X's price is expected to be higher than Stock Y's price