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. 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?

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Firm Current earnings Current dividend Expected annual growth rate in $3.20 $3.00 2% $2.00 $1.00 7% $7.00 $7.50 dividends and earnings Current market price 23 $47 $60