CHAPTER NE The Valuation of Common Stock 343 5. You are considering two stocks. Both pay a dividend of $1, but the beta coefficient of A is 1.5 while the beta coefficient of B is 0.7. Your required return is a) What is the required return for each stock? b) If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 5 percent? c) The earnings and dividends of B are expected to grow annually at 10 percent. Would you buy the stock for S30? d) If the earnings and dividends of A were expected to grow annually at 10 percent, would it be a good buy at S30? 6. You are offered two stocks. The beta of A is 1.4 while the beta of Bis 0.8. The growth of earnings and dividends 10 percent and s percent, respectively. The dividend yields are percent and percent, respectively. a) Since A offers higher potential growth, should it be purchased? b) Since B offers a higher dividend yield, should it be purchased? c) If the risk-free rate of return were 7 percent and the return on the market is ex- pected to be 14 percent, which of these stocks should be bought? 7. Your broker suggests that the stock of QED is a good purchase at s25. You do an anal- ysis of the firm, determining that the $1.40 dividend and earnings should continue to grow indefinitely at 5 percent annually.The firm's coefficient is and the yield on Treasury bills is 1.4 percent. If you expect the market to earn a return of 8 percent, should you follow your broker's suggestion? 8. The required return on an investment is 10 percent. You estimate that firm X's divi dends will grow as follows Year $1.20 3.00 For the subsequent years you expect the dividend to grow but at the modest rate of 4 percent annually. What is the maximum price that you should pay for this stock? 9. Management has recently announced that expected dividends for the next three years will be as follows: Dividend $2.50 4,00 For the subsequent years, management expects the dividend to grow at 5 percent an nually. If the risk-free rate is 4.3 t, the return on the market is 10.3 perce and percent the firm's beta is 1.4, what is the maximum price that you should pay for this stock