The security market line is estimated to be k = 5% 1 (10.4% 5%). You are

Question:

The security market line is estimated to be k = 5% 1 (10.4% – 5%)β. You are considering two stocks. The beta of A is 1.4. The firm offers a dividend yield during the year of 4 percent and a growth rate of 7 percent. The beta is 0.8. The firm offers a dividend yield during the year of 5 percent and a growth rate of 3.8 percent.

a. What is the required return for each security?

b. Why are the required rates of return different?

c. Since A offers higher potential growth, should it be purchased?

d. Since B offers higher dividend yield, should it be purchased?

e. Which stock(s) should be purchased?

Dividend
A dividend is a distribution of a portion of company’s earnings, decided and managed by the company’s board of directors, and paid to the shareholders. Dividends are given on the shares. It is a token reward paid to the shareholders for their...

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