An investor with a required return of 14% 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

Current Earnings

$2.00

Current Dividend

$1.00

Expected Annual Growth Rate in dividends and earnings

7%

Current Market Price

$23

Firm B

Current Earnings

$3.20

Current Dividend

$3.00

Expected Annual Growth Rate in dividends and earnings

2%

Current Market Price

$47

Firm C

Current Earnings

$7.00

Current Dividend

$7.50

Expected Annual Growth Rate in dividends and earnings

-1%

Current Market Price

$60

a. What is the maximum price that the investor should pay for each stock based on dividend-growth model ?

b. If the investor does buy stock A, what is implied percentage return ?

c. If the appropriate P/E is 12, what is the maximum price investor should pay for each stock ? Would your answers be different if the appropriate P/E were 7 ?

d. What does the stock C's negative growth rate imply ?