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

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