Stocks a and b have the following data assuming the

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Applied Calculus
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Chapter 9 / Exercise 33
Applied Calculus
Berresford/Rockett
Expert Verified
6. 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 Required return 10% 12% Market price $25 $40 Expected growth 7% 9% a. These two stocks should have the same price. b. These two stocks must have the same dividend yield. c. These two stocks should have the same expected return. d. These two stocks must have the same expected capital gains yield. e. These two stocks must have the same expected year-end dividend. ANS: B The following calculations show that answer b is correct. The others are all wrong. A B Expected return 10% 12% Expected growth 7% 9% Dividend yield 3% 3%
PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire an understanding of stocks and bonds. 7. 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 7% 9% Expected return 10% 12%
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Applied Calculus
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Chapter 9 / Exercise 33
Applied Calculus
Berresford/Rockett
Expert Verified
A B Price $25 $40 Expected growth 7% 9% Expected return 10% 12% A = P 0 = D 1 /(r – g) = D 1 =P 0 (r) – P 0 (g) = $0.75 B = P 0 = D 1 /(r – g) = D 1 =P 0 (r) – P 0 (g) = $1.20 PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire an understanding of stocks and bonds. 8. Stocks A and B have the same price and are in equilibrium, but Stock A has the higher required rate of return. Which of the following statements is CORRECT?
PTS: 1 DIF: MEDIUM NAT: Analytic skills LOC: Students will acquire an understanding of stocks and bonds.

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