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An investor with a required return of 12 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows:   Firm   A   B   C   Current earnings $ 2.50 $ 3.20 $ 6.60   Current dividend $ 1.40 $ 2.30 $ 7.50   Expected annual growth rate in   5 % 2 % -2 % dividends and earnings               Current market price $ 29 $ 28 $ 59

An investor with a required return of 12 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows:   Firm   A   B   C   Current earnings $ 2.50 $ 3.20 $ 6.60   Current dividend $ 1.40 $ 2.30 $ 7.50   Expected annual growth rate in   5 % 2 % -2 % dividends and earnings               Current market price $ 29 $ 28 $ 59

Essentials Of Investments
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
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Problem 11-03

An investor with a required return of 12 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows:

 

Firm   A   B   C  
Current earnings $ 2.50 $ 3.20 $ 6.60  
Current dividend $ 1.40 $ 2.30 $ 7.50  
Expected annual growth rate in   5 % 2 % -2 %
dividends and earnings              
Current market price $ 29 $ 28 $ 59  

 

 

    1. What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent.

 

Stock A: $  

Stock B: $  

Stock C: $  

 

    1. If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places.

 

  %

 

    1. If the appropriate P/E ratio is 13, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent.

 

Stock A: $  

Stock B: $  

Stock C: $  

      If the appropriate P/E ratio is 7, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent.

Stock A: $  

Stock B: $  

 

 

 

Stock C: $  
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