An investor with a required return of 14 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information as follows: Firm A B Current earnings $2.10 $3.50 $6.80 Current dividend $1.70 $4.30 $8.10 Expected annual growth rate in 5% 3% -3% dividends and earnings Current market price $ 25 $ 48 $ 54 a. 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: $ b. If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % c. If the appropriate P/E ratio is 15, 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 6, 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: $

An investor with a required return of 14 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information as follows: Firm A B Current earnings $2.10 $3.50 $6.80 Current dividend $1.70 $4.30 $8.10 Expected annual growth rate in 5% 3% -3% dividends and earnings Current market price $ 25 $ 48 $ 54 a. 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: $ b. If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % c. If the appropriate P/E ratio is 15, 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 6, 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: $

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

Problem 1PS

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You have assigned the following values to these three firms: US Bancorp Praxair Eastman Kodak Price $34.55 37.80 50.35 Upcoming Dividend $ 2.35 1.36 2.00 US Bancorp required return Praxair required return Eastman Kodak required return Growth CAPM 6.20% Assume that the market portfolio will earn 13.30 percent and the risk-free rate is 6.00 percent. Compute the required return for each company using both CAPM and the constant-growth model. Note: Do not round intermediate calculations and round your final answers to 2 decimal places. 0.18 X % 0.24 X % 0.11 % 13.50 13.80 X Answer is complete but not entirely correct. Beta 1.67 2.49 0.64 Constant-Growth Model 0.16 X % 0.18% 0.17
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