Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? A B Beta1.100.90Constant growth rate7.00%7.00% a. Stock B could have the higher expected return. b. Stock A must have a higher stock price than Stock B. c. Stock A must have a higher dividend yield than Stock B. d. Stock B's dividend yield equals its expected dividend growth rate. e. Stock B must have the higher required return.

Information Provided: Market risk premium = 6% Risk free rate = 6.3% Beta A = 1.10 B = 0.90…

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate is 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT?

Corporate Fin Focused Approach

5th Edition

ISBN:9781285660516

Author:EHRHARDT

Publisher:EHRHARDT

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

	A	B
Beta	1.10	0.90
Constant growth rate	7.00%	7.00%

a. Stock B could have the higher expected return.

b. Stock A must have a higher stock price than Stock B.

c. Stock A must have a higher dividend yield than Stock B.

d. Stock B's dividend yield equals its expected dividend growth rate.

e. Stock B must have the higher required return.

Definition Definition Dividend rate is the percentage of total net income distributed as dividend to the shareholders.

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