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? ABPrice$25$25Expected growth (constant)10%5%Required return15%15%Select one:a.The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.b.Stock A has a higher dividend yield than Stock B.c.Stock A's expected dividend at t = 1 is only half that of Stock B.d.Currently the two stocks have the same price, but over time Stock B's price will pass that of A.e.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.

Answered: and B have the following data. Assuming…

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 11P

See similar textbooks

Related questions

Concept explainers

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%

Select one:

The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.

Stock A has a higher dividend yield than Stock B.

Stock A's expected dividend at t = 1 is only half that of Stock B.

Currently the two stocks have the same price, but over time Stock B's price will pass that of A.

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.

Definition Definition Degree to which financial markets incorporate all available information into the prices of assets. In a more efficient market, the prices reflect the available information more than that in a weak efficient market. It is difficult for investors to outperform the market in a strong efficient market. This is because all the available information is already discounted in the asset's price. However, in a weak-form efficiency, the market does not reflect all information in the asset's price. As a result, it becomes easier to generate better returns in a weak form or an inefficient market.

Expert Solution

Step 1

The constant growth model is used extensively to determine the price of stock and from the price of stock we can say that it is undervalued or overvalued.

Trending now

This is a popular solution!

Step by step

Solved in 2 steps

SEE SOLUTION Check out a sample Q&A here

Knowledge Booster

Learn more about

Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, finance and related others by exploring similar questions and additional content below.

Similar questions