Let's assume that you're thinking about buying stock in West Coast Electronics. So far in your analysis, you've uncovered the following information: The stock pays annual dividends of $4.97 a share indefinitely. It trades at a P/E of 10.5 times earnings and has a beta of 1.19. In addition, you plan on using a risk-free rate of 5.00% in the CAPM, along with a market return of 11%. You would like to hold the stock for 3 years, at the end of which time you think EPS will be $7.91 a share. Given that the stock currently trades at $57.97, use the IRR approach to find this security's expected return. Now use the dividend valuation model (with constant dividends) to put a price on this stock. Does this look like a good investment to you? Explain.
Let's assume that you're thinking about buying stock in West Coast Electronics. So far in your analysis, you've uncovered the following information: The stock pays annual dividends of $4.97 a share indefinitely. It trades at a P/E of 10.5 times earnings and has a beta of 1.19. In addition, you plan on using a risk-free rate of 5.00% in the CAPM, along with a market return of 11%. You would like to hold the stock for 3 years, at the end of which time you think EPS will be $7.91 a share. Given that the stock currently trades at $57.97, use the IRR approach to find this security's expected return. Now use the dividend valuation model (with constant dividends) to put a price on this stock. Does this look like a good investment to you? Explain.
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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#24 investment
Let's assume that you're thinking about buying stock in West Coast Electronics. So far in your analysis, you've uncovered the following information: The stock pays annual dividends of
$4.97
a share indefinitely. It trades at a P/E of
10.5
times earnings and has a beta of
1.19.
In addition, you plan on using a risk-free rate of
5.00%
in the CAPM, along with a market return of
11%.
You would like to hold the stock for 3 years, at the end of which time you think EPS will be
$7.91
a share. Given that the stock currently trades at
$57.97,
use the IRR approach to find this security's expected return. Now use the dividend valuation model (with constant dividends) to put a price on this stock. Does this look like a good investment to you? Explain.Expert Solution
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