Question

Which assertion about stocks gamma, Hotel, India, and Juliet is true if PH > PJ > 0 and PI > PG > 0? And:

• All 4 stocks pay annual dividends with the next dividend expected to be paid in 1 year.
• The dividends for each stock are expected to grow at a constant rate of G forever.
• The expected returns for stocks Juliet and Hotel are expected to be different, and the expected returns for stocks India and Gamma are expected to be the same.
• The next expected dividends for stocks India and Gamma are expected to be different and the next expected dividends for stocks Juliet and Hotel are expected to be the same.
• Assume all expected dividends, growth rates, and returns are positive and all expected growth rates are less than all expected returns.

	A.	The expected return of stock Hotel is greater than the expected return of stock Juliet and the next expected dividend of stock India is greater than the next expected dividend of stock Gamma.
	B.	Answer not listed or not possible.
	C.	The expected return of stock Juliet is greater than the expected return of stock Hotel and the next expected dividend of stock Gamma is greater than the next expected dividend of stock India.
	D.	The expected return of stock Juliet is greater than the expected return of stock Hotel and the next expected dividend of stock India is greater than the next expected dividend of stock Gamma.
	E.	The expected return of stock Hotel is greater than the expected return of stock Juliet and the next expected dividend of stock Gamma is greater than the next expected dividend of stock India.

Answer 1

Answer-

Given

PH > PJ > 0 and PI > PG > 0 ( H - Hotel, J = Juliet, I =India and G = Gamma)
expected returns Juliet and Hotel are expected to be different, and the expected returns  India = Gamma
expected dividends India and Gamma are expected to be different and expected dividends Juliet = Hotel
all dividends, growth rates, and returns are positive and all expected growth rates < expected returns. ( g < r)

As we know that P0 = D1 / ( r - g) [ D1 -next year dividend, r - expected return and g = expected growth rates]
r = D1 / P0 + g ------- ------------- 1
D1 = P0 x ( r - g) ------------------ 2

The Correct Option is D.

The expected return of stock Juliet is greater than the expected return of stock Hotel and the next expected dividend of stock India is greater than the next expected dividend of stock Gamma.

As the Dividend for Hotel and Juliet are expected to be same and PH >PJ therefore as per equation 1 the expected return of stock Juliet will be more than expected return stock of Hotel.
As the expected returns of stock India = expected returns of stock Gamma and PI > PG  so as per the equation 2 the expected divdend of stock India is greater than the expected dividend of stock Gamma.

The other Options are A,B,C and E are incorrect.