Reference no: EM132911645

Question - Consider stock A with a dividend yield equal to 2.5% (based on dividend payments over the past year). The dividends are expected to grow at 8% per year. Stock A is currently traded at $52 per share.

-According to Gordon's model, what would be the expected return on the stock?

-Suppose the total dividends paid over the next year is $1.4 per share, leading to a downward revision of the expected dividend growth rate to 7.5%. Assume the expected rate of return remains the same for this stock, what would be the actual rate of return from holding this stock over the next year?

-Consider stock B which just paid $6 in dividends over the past year. The expected return on the stock is 12.5% and the stock is currently traded at $120 per share. At what rate are the dividends expected to grow for this stock according to Gordon's model?

-The Sharpe ratio on a stock equals the stock's expected excess return divided by its standard deviation (volatility), where the expected excess return is the stock's expected return minus the risk-free rate. Suppose that stock A's return has a standard deviation of 11.2% and stock B's return has a standard deviation of 15.4 %. The yield for 10-year US Treasury bill is 0.8%. Calculate the Sharpe ratio on stock A and stock B.