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14 June, 06:03

Stocks A and B have the following data. The market risk premium is 6.0% and the risk-free rate 6.4%. Assuming the stock market is efficient and the stocks are in equilibrium, does stock A has higher dividend yield than Stock B? A B Beta 1.10 0.90 Constant growth rate 7.00% 7.00% Provide detailed explanation

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  1. 14 June, 08:32
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    Yes, Stock A has higher dividend yield

    Explanation:

    given data

    market risk premium = 6.0%

    risk-free rate = 6.4%

    A B

    Beta 1.10 0.90

    Constant growth rate 7 % 7%

    to find out

    does stock A has higher dividend yield than Stock B

    solution

    we get here Stock A rA = 6.4% + 1.1 * 6%

    Stock A rA = 13.00%

    and

    Dividend yield of stock A = rA - g

    Dividend yield of stock A = 13.00% - 7%

    Dividend yield of stock A = 6%

    and

    for Stock B rB = 6.4%+.9 * 6%

    Stock B rB = 11.80%

    and

    Dividend yield of stock B = rA - g

    Dividend yield of stock B = 11.80% - 7%

    Dividend yield of stock B = 4.80%

    so we can say Yes, Stock A has higher dividend yield
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