Stocks A and B have the same price and are in equilibrium, but Stock A has the h
ID: 2688279 • Letter: S
Question
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? Question options: If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's. Stock A must have a higher dividend yield than Stock B. Stock A must have both a higher dividend yield and a higher capital gains yield than Stock B. If Stock A has a higher dividend yield than Stock B, its expected capital gains yield must be lower than Stock B's. Stock B must have a higher dividend yield than Stock A.Explanation / Answer
If Stock A has a lower dividend yield than Stock B, its expected capital gains yield must be higher than Stock B's
The above Statement a is true, because if the required return for Stock A is higher than that of Stock B, also if the dividend yield for Stock A is less than Stock B's, as a result the growth rate for Stock A must be higher in order to equalate it.
hence, the correct option is A.