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$40Expected growth7%9%Expected return10%12%a. The two stocks could not be in equilibrium with the numbers given in the question.b. A's expected dividend is $0.50.c. B's expected dividend is $0.75.d. A's expected dividend is $0.75 and B's expected dividend is $1.20.e. The two stocks should have the same expected dividend.

The objective of the question is to determine the correct statement about the expected dividends of…

Answered: Stocks A and B have the following data.…

Managerial Accounting

15th Edition

ISBN:9781337912020

Author:Carl Warren, Ph.d. Cma William B. Tayler

Publisher:Carl Warren, Ph.d. Cma William B. Tayler

Chapter16: Financial Statement Analysis

Section: Chapter Questions

Problem 2MAD

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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	$40
Expected growth	7%	9%
Expected return	10%	12%

a. The two stocks could not be in equilibrium with the numbers given in the question.

b. A's expected dividend is $0.50.

c. B's expected dividend is $0.75.

d. A's expected dividend is $0.75 and B's expected dividend is $1.20.

e. The two stocks should have the same expected dividend.

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.

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