An investor with a required return of 14 percent for very risky investments in c

Question

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:
a b c

Current earnings- $2.00 $3.20 $7.00
Current dividend- $1.00 $3.00 $7.00
Expected annual growth rate
in dividends and earnings.- 7% 2% -1%
Current Market place- $23 $47 $60


a. What is the maximum price that the investor should pay for each stock based on the dividend growth-model?
b. If the investor does buy stock A, what is the implied percentage return?
c. If the appropriate P/E ratio is 12, what is the maximum price the investor should pay for each stock? Would your answers be different if the appropriate P/E were 7?
d. What does stock C’s negative growth rate imply?

Explanation / Answer

Max price paid in given conditons

a) $15.29

$25.50

$49.50

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