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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.
  2. 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: $  

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Expert Solution

jeff jeffy answered 1 year ago
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