9-An investor with a required return of 10 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:

McD KFC W

Current Earnings $2.00 $3.00 $6.50

Current Dividend $1.20 $2.80 $7.00

Expected annual growth rate in dividends 5% 3% -2%

and earnings

Current share prices $25 $48 $75

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 McD, 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 Ws negative growth rate imply?