Monica Dubois, an ABC investment advisor, has a new client, Mr. Jack Klein. Mr. Klein is a conservative investor who is interested in a required rate of return of 10% on his stock investments while assuming lower market risk. You are asked to help Monica make a suitable portfolio recommendation backed by risk-return calculations. The 3 possible stock choices for Mr. Klein and their respective betas are as follows:

ABC 10% EXPECTED RETURN 0.75BETA

XYZ 11% EXPECTED RETURN 1 BETA

WHY 12% EXPECTED RETURN 1.25 BETA

Part I

Determine the expected returns and beta for a portfolio consisting of one third of Mr. Klein's funds in each stock.

USE: .33 *(RATE OF RETURN 1)+.33 *(RATE OF RETURN 2)+.33 *(RATE OF RETURN 3)

BETA:: .33*(B1)+ .33*(B2)+ .33*(B3)

Part II

Assume the following:

• Each ABC stock pays current dividends of $1.50 annually with 6% expected annual increases. The current market stock price for ABC is $30 per share.
• Each XYZ stock pays current dividends of $1.75 annually with 6% expected annual increases. The current market stock price for XYZ is $27 per share.
• Each WHY stock pays current dividends of $2.25 annually with 7% expected annual increases. Current market stock price for WHY is $35 per share.

Complete the following for this assignment:

• Using the constant dividend growth model, determine whether ABC and WHY are over- or undervalued.

USE

VALUE OF STOCK = DIVIDEND PAID AT PERIOD 1 / (INVESTORS REQUIRED RATE OF RETURN - DIVIDEND EXPECTED GROWTH RATE) And DIVIDEND / (INVESTORS REQUIRED RATE OF RETURN - DIVIDEND EXPECTED GROWTH RATE) 

IF CALCULATION GREATER THAN STOCK PRICE STOCK IS OVER VALUED else its undervalued

Please SHOW STEP BY STEP The Calculation. Professor says dividend is paid four times a year. I don't know when in the calculation I divide the dividend by 4 per period. 

• For what types of companies is the constant growth model an appropriate analysis tool?
• What are the limitations of the constant growth model?