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
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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 is
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: $
Transcribed Image Text: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 is 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: $
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