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Multiple Stock Dividend And Growth Rate Comparison

Stock X has a required return of 12 percent, a dividend yield of 5 percent, and its dividend will grow at a constant rate forever. Stock Y has a required return of 10 percent, a dividend yield of 3 percent, and its dividend will grow at a constant rate forever. Both stocks currently sell for $25 per share. Which of the following statements is most correct?

a.Stock X pays a higher dividend per share than stock Y.
b.Stock X has a lower expected growth rate than stock Y.
c.One year from now, the two stocks are expected to trade at the same price.
d.Statements a and b are correct
e.Statements a and c are correct.

Solution Preview

Stock X:
K = 12%, D/P = 5%, g = K-D/P = 7%

Stock Y:
K = 10%, D/P = ...

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