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Answer to Question #6132 in Economics of Enterprise for Lamarcus Streeter

Question #6132
2. 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%

a. Stock A&#039;s expected dividend at t = 1 is only half that of Stock B.
b. Stock A has a higher dividend yield than Stock B.
c. Currently the two stocks have the same price, but over time Stock B&#039;s price will pass that of A.
d. Since Stock A&rsquo;s growth rate is twice that of Stock B, Stock A&rsquo;s future dividends will always be twice as high as Stock B&rsquo;s.
e. The two stocks should not sell at the same price. If their prices are equal, then a disequilibrium must exist.
Expert's answer
c is correct answer. Currently the two stocks have the same price, but over time
Stock B&#039;s price will pass that of A because expected growth of Stock A&#039;s is
higher then Stock B&#039;s, so over the time price of Srock B will be less then A&#039;s

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