Questions: Stocks X and Y have the following data. Assuming the stock market is efficient and the stocks are in equilibrium, which of the following statements is CORRECT? Price Expected dividend yield Required return X Y 25 25 5% 3% 12% 10% a. Stock X pays a higher dividend per share than Stock Y. b. One year from now, Stock X should have the higher price. c. Stock Y has the higher expected capital gains yield. d. Stock Y has a lower expected growth rate than Stock X. e. Stock Y pays a higher dividend per share than Stock X

The answer is the first one (a): Stock $X$ pays a higher dividend per share than Stock $Y$.

Let's analyze each option to determine why it is correct or incorrect:

a. Stock $X$ pays a higher dividend per share than Stock $Y$.

• The expected dividend yield is given as 5% for Stock X and 3% for Stock Y. Since both stocks have the same price ($25), the dividend per share can be calculated as:
  • Dividend for Stock X = 5% of $25 = 0.05 * $25 = $1.25
  • Dividend for Stock Y = 3% of $25 = 0.03 * $25 = $0.75
• Therefore, Stock X pays a higher dividend per share than Stock Y. This statement is correct.

b. One year from now, Stock $X$ should have the higher price.

• The price of a stock one year from now depends on various factors, including the expected growth rate and market conditions. The information provided does not give enough data to conclusively determine the future price of the stocks. This statement is not necessarily correct.

c. Stock $Y$ has the higher expected capital gains yield.

• The required return for Stock X is 12%, and for Stock Y, it is 10%. The expected capital gains yield can be calculated as the required return minus the dividend yield:
  • Capital gains yield for Stock X = 12% - 5% = 7%
  • Capital gains yield for Stock Y = 10% - 3% = 7%
• Both stocks have the same expected capital gains yield of 7%. This statement is incorrect.

d. Stock $Y$ has a lower expected growth rate than Stock $X$.

• The expected growth rate can be inferred from the capital gains yield, which is the same for both stocks (7%). Therefore, Stock Y does not have a lower expected growth rate than Stock X. This statement is incorrect.

e. Stock Y pays a higher dividend per share than Stock X.

• As calculated in option (a), Stock Y pays a lower dividend per share ($0.75) compared to Stock X ($1.25). This statement is incorrect.

In summary, the correct statement is: a. Stock $X$ pays a higher dividend per share than Stock $Y$.