BACKGROUND INFO:

Gianna Peters is an investment analyst who focuses on dividend-paying stocks. Peter uses a discounted cash flow (DCF) approach to stock selection. She is getting with her staff to evaluate portfolio holdings based on a bottom-up screening of stocks listed in the United States and Canada. Peters and her staff begin reviewing the characteristics of the following portfolio candidates.

Company ABC

A Canadian company in the customer staples sector with a required rate of return of 7.35%. Recent media reports suggest that ABC might be a takeover candidate. Peters and her team estimate that if the incumbent Canadian prime minister's party retains its power, the company's current annual dividend of C$0.65 per share will grow 12% a year for the next four years and the stabilize to 3.5% growth rate a year indefinitely. However, if a new government takes office in Canada, then the team estimates that ABC will likely not experience the elevated 12% short-run growth because of new regulatory and tax changes, and instead will grow by 3.5 indefinitely.

Company XYZ

A mid sized US company in the utilities sector with a required rate of return of 10%. Peters and her team believe that because of a recent restructuring, the company is unlikely to pay dividends for the next three years. However, the team expects XYZ to pay an annual dividend of US $1.72 per share beginning four years from now. Thereafter, the dividend is expected to grow indefinitely at 4% even though the current price implies a growth rate of 6% during this same period.

Company JZY

A large US company in the telecom sector with a required rate of return of 8%. The stock is currently trading at US$36.76 per share with an implied earnings growth rate of 3.5%. Peters believes that because JZY is mature and has a stable capital structure, the company will grow at its sustainable growth rate. Over the past 10 years, the company's return on equity (ROE) has averaged 8.17% and its payout ratio has averaged 40%. Recently, the company paid an annual dividend of US$0.84 per share.

Peters asks the team to examine the growth opportunities of three Canadian stocks currently held in the portfolio. These stocks are listed below Exhibit 1:

STOCK	REQUIRED RATE OF RETURN	NEXT YRS FORECASTED EPS (C$)	CURRENTPRICEPERSHARE(C$)
ABTD	10.5%	7.30	80.00
BKKQ	8%	2.12	39.00
CPMN	12%	1.90	27.39

QUESTIONS:

1. Based on Exhibit 1, the stock with the largest present value of growth opportunities (PVGO) is:

A. ABTD

B. BKKQ

C. CPMN

2. Based on Exhibit 1, the growth component of the leading P/E is largest for:

A. ABTD

B. BKKQ

C. CPMN