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Let's assume that you're thinking about buying stock in West Coast Electronics. So far in your analysis, you've uncovered the following information: The stock pays
Let's assume that you're thinking about buying stock in West Coast Electronics. So far in your analysis, you've uncovered the following information: The stock pays annual dividends of $5.27 a share indefinitely. It trades at a P/E of 10.8 times earnings and has a beta of 1.18. In addition, you plan on using a risk-free rate of 3.00% in the CAPM, along with a market return of 11%. You would like to hold the stock for 3 years, at the end of which time you think EPS will be $7.86 a share. Given that the stock currently trades at $65.19, use the IRR approach to find this security's expected return. Now use the dividend valuation model (with constant dividends) to put a price on this stock. Does this look like a good investment to you? Explain. This security's expected return (IRR) is %. (Round to two decimal places.) The value of the stock is $. (Round to the nearest cent.) Using the dividend valuation model (with constant dividends), the value of the stock is $(Round to the nearest cent) Does this look like good investment to you? Explain. (Select the best choice below.) O A. No, the stock looks like it would not make a good investment. It has a justified price that is below its current market price, and its expected return is lower than the required return. OB. No, the stock looks like it would not make a good investment. It has a justified price is above its current market price, and its expected return is higher than the required return. OC. Yes, the stock looks like it would make a good investment. It has a justified price that is below its current market price, and its expected return is lower than the required return. OD. Yes, the stock looks like it would make good investment. It has a justified price that is above its current market price, and its expected return is higher than the required return 2
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