Assume the Gordon Model is appropriate for valuing stocks A and B. Further assum
ID: 2729262 • Letter: A
Question
Assume the Gordon Model is appropriate for valuing stocks A and B. Further assume that both stocks are in equilibrium. Based on the following data, stock A's expected dividend at t=1 isonly half that os Stock B. TRUE OR FALSE?
A B
Price 25 25
Expected growth (constant) 10% 5%
Required Return 15% 15%
Explanation / Answer
Details Stock A Stock B Price 25 25 Expected growth rate =g= 10% 5% Required return rate =k= 15% 15% Expected dividend at t=1 a1 b1 As per Gordon Model Stock Price=D1/(k-g)= 25=a1/(0.15-0.10) 25=b1/(0.15-0.05) a1=1.25 b1=2.5 Expected dividend at t=1 1.25 2.50 So Expected dividend at t=1 is only half of that of Stock B So the statement is TRUE.