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Consider the following information for the following stocks: Stock M Stock N ROE 12% 12% Retention rate 60% 30% Required return 12% 12% Expected dividends

  1. Consider the following information for the following stocks:

Stock M Stock N

ROE 12% 12%

Retention rate 60% 30%

Required return 12% 12%

Expected dividends $1.00 $1.75

Which stock will be more sensitive to the spread between the required return and growth? Why?

2. A stock is expected to grow at a rate of 5% indefinitely. The required rate of return is 15%. The company paid a dividend of $3. What is the value of the stock?

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