Asked by Kyran English on May 27, 2024
Verified
If two constant growth stocks have the same price and the same required rate of return,which of the following statements is correct?
A) If one stock has a higher dividend yield, it will also have a lower dividend growth rate.
B) The two stocks have the same dividend growth rate.
C) The two stocks have the same dividend yield.
D) The stock with the higher dividend yield will have the higher dividend growth rate.
Dividend Yield
A financial ratio that shows how much a company pays out in dividends each year relative to its stock price.
Constant Growth
Constant growth refers to a situation where a quantity or system experiences growth at a steady and unvarying rate over a period of time, often used in dividend growth models.
Required Rate of Return
The required rate of return is the minimum expected return an investor demands for holding a risky investment, compensating for the risk taken.
- Calculate predicted returns, rates of dividend yields, and growth rates for stocks.
- Evaluate the influence of growth rates and dividend policies on determining the value of stocks.
Verified Answer
AA
AKHIL AKKIRAJUMay 28, 2024
Final Answer :
A
Explanation :
Given the same price and required rate of return, if one stock offers a higher dividend yield, it must compensate with a lower growth rate to maintain the same overall return. This is because the total return is a combination of dividend yield and growth rate.
Learning Objectives
- Calculate predicted returns, rates of dividend yields, and growth rates for stocks.
- Evaluate the influence of growth rates and dividend policies on determining the value of stocks.