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
Beta1.10
0.90
Constant growth rate7.00%
7.00%
A. Stock A must have a higher dividend yield than Stock B.
B. Stock B's dividend yield equals its expected dividend growth rate.
C. Stock B must have the higher required return.
D. Stock B could have the higher expected return.
E. Stock A must have a higher stock price than Stock B.
Answer: A
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