Problem 11-03 An investor with a required return of 14 percent for very risky investments in...

Problem 11-03

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		C
Current earnings	$	2.20	$	3.30	$	7.30
Current dividend	$	1.20	$	2.50	$	8.20
Expected annual growth rate in		6	%	2	%	-3	%
dividends and earnings
Current market price	$	19	$	25	$	48

Stock A: $

Stock B: $

Stock C: $

%

Stock A: $

Stock B: $

Stock C: $

- 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.
- 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.
If the appropriate P/E ratio is 5, 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: $

Expert Solution

jeff jeffy answered 11 months ago

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