An investor with a required return of 16 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 $ 2.40 $ 3.50 $ 7.50 Current dividend $ 2.30 $ 2.40 $ 6.70 Expected annual growth rate in 5 % 1 % -2 % dividends and earnings Current market price $ 23 $ 20 $ 43 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: $ If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % If the appropriate P/E ratio is 11, 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 4, 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 16 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 $ 2.40 $ 3.50 $ 7.50 Current dividend $ 2.30 $ 2.40 $ 6.70 Expected annual growth rate in 5 % 1 % -2 % dividends and earnings Current market price $ 23 $ 20 $ 43 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: $ If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % If the appropriate P/E ratio is 11, 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 4, 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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Question
An investor with a required return of 16 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 | $ | 2.40 | $ | 3.50 | $ | 7.50 | |
| Current dividend | $ | 2.30 | $ | 2.40 | $ | 6.70 | |
| Expected annual growth rate in | 5 | % | 1 | % | -2 | % | |
| dividends and earnings | |||||||
| Current market price | $ | 23 | $ | 20 | $ | 43 |
- 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: $
- If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places.
%
- If the appropriate P/E ratio is 11, 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 4, 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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