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Stock valuation and Comparison of Returns

Stock valuation and Comparison of Returns

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"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
Beta 1.10 0.90
Constant growth rate 7.00% 7.00%

a. Stock A must have a higher stock price than Stock B.
b. Stock A must have a higher dividend yield than Stock B.
c. Stock B’s dividend yield equals its expected dividend growth rate.
d. Stock B must have the higher required return.
e. Stock B could have the higher expected return.
"
c
"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
Beta 1.10 0.90
Constant growth rate 7.00% 7.00%

a. Stock A must have a higher stock price than Stock B.
b. Stock A must have a higher dividend yield than Stock B.
c. Stock B’s dividend yield equals its expected dividend growth rate.
d. Stock B must have the higher required return.
e. Stock B could have the higher expected return.
"
c

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D₁/P₀ = Dividend Yield and g = Capital gain yield With the given data. Stock B could have the higher expected return.0% and the risk-free rate is 6. e.10 7. The market risk premium is 6.00% B 0. Stock B’s dividend yield equals its expected dividend growth rate. Stock A must have a higher dividend yield than Stock B. c. http://classof1. P₀ = D₁ /(Re . Stock B must have the higher required return. P₀ = Current Market Price of the stock D₁ = Expected dividend at the end of current year Re = required rate of Return g = Growth rate in dividend It can also be rearranged as Re = D₁/P₀ + g Where.00% a.g) Where. d. we need to calculate Re using a Capital Asset Pricing Model (CAPM) .com/homework-help/finance-homeworkhelp/?utm_source=Scribd&utm_medium=SL_ebook&utm_term=fina *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for submitting the same in lieu of their academic submissions for grades. Stock A must have a higher stock price than Stock B.90 7. Assuming the stock market is efficient and the stocks are in equilibrium.4%. Solution: As per the constant growth model. nce&utm_content=footer&utm_campaign=%5BDoc%2BUploads%5 D . which of the following statements is CORRECT? A Beta Constant growth rate 1.Sub: Finance Stock valuation and Comparison of Returns Question: Topic: Cost of Capital Stocks A and B have the following data. b.

80% 6.00% 11. As we can see in the above calculation.40% 6% 0. (d) are false.8% Statements (c).40% 6% 1. http://classof1. nce&utm_content=footer&utm_campaign=%5BDoc%2BUploads%5 D . Re = Rf + (Rm-Rf) xβ Topic: Cost of Capital Here. Statement (b) is correct.00% 4.80% Statement (a) cannot be stated because the stock price will also depend upon the dividend paid by both the stocks.com/homework-help/finance-homeworkhelp/?utm_source=Scribd&utm_medium=SL_ebook&utm_term=fina *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for submitting the same in lieu of their academic submissions for grades. Re = Market Risk Premium + Risk free Rate of Return Given data Stock A Stock B Risk free Rate (Rf) Market Risk Premium (Rm .1 7% 6. (Rm-Rf) = Market Risk Premium.Sub: Finance As per CAPM.9 7% 13. Statement (e) cannot be calculated because of the lack of data.Rf) Beta (β) Constant Growth Rate Re = Rf + (Rm-Rf)x β = Dividend Yield = D₁/P₀ = (Re-g) = 6. Stock A has a dividend yield of 6% which is higher than stock B's yields of 4. β = Beta and Rf = risk free rate of Return So.

Sub: Finance Topic: Cost of Capital For more details on Classof1 or customized academic assistance please feel free to write to us at learning@classof1.com or call our toll-free number 1.877. nce&utm_content=footer&utm_campaign=%5BDoc%2BUploads%5 D .252.com/homework-help/finance-homeworkhelp/?utm_source=Scribd&utm_medium=SL_ebook&utm_term=fina *The Homework solutions from Classof1 are intended to help students understand the approach to solving the problem and not for submitting the same in lieu of their academic submissions for grades. The list of subject areas in which we offer academic assistance is as given below: 1 Accounting 23 Engineering 24 English 25 Environmental Engineering 26 Environmental Science 27 Essay Writing 28 Finance 29 Financial Accounting 30 General Studies 31 Geography 32 Geology 33 HBS Case Studies 34 History 35 Hospitality Management 36 Human Resource Management 37 Information Systems 38 International Economics 39 International Finance 40 Investment Portfolio Management 41 MS-Office 42 Macro Economics 43 Management Accounting 44 Marketing 45 Mass Communication 46 Materials Engineering 47 Math 48 Mechanical Engineering 49 Medical Science 50 Micro Economics 51 Nursing 52 Operations Management 53 Philosophy 54 Physics 55 Physiology 56 Political Science 57 Psychology 58 Religious Studies 59 Rhetoric 60 Social Studies 61 Social Work 62 Sociology 63 Statistics 64 Taxation 65 Zoology 2 Actuarial Science 3 Anatomy 4 Anthropology 5 Architecture 6 Astronomy 7 Biochemical Engineering 8 Biochemistry 9 Biology 10 Business Law 11 Business Management 12 Chemical Engineering 13 Chemistry 14 Civil Engineering 15 Classical Studies 16 Computer Science 17 Corporate Finance 18 Corporate Strategy 19 Cost Accounting 20 Earth Science 21 Economics 22 Electrical Engineering http://classof1.7763.

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