Parkland Corporation (PKI) and Bell Canada Enterprises (BCE) are both well-known Canadian companies that trade on the Toronto Stock Exchange.

As of the writing of this assignment they traded at $41.27 (PKI) and $50.68 (BCE). You are provided the following information:

91-day Government of Canada T-bill rate 5.16%

Your expected return on the TSX for the coming year 10%

BCE beta .52

PKI beta 1.42

Expected growth rate for each company is 5%

You can reasonably estimate dividends over the next three years given the expected state of the economy. All dividends received after year 3 are assumed to be a growth perpetuity.

Annual dividend as of last year for PKI $1.36

Annual dividend as of last year for BCE $3.88

Part 1

What is your estimated price for BCE?

Answer

a.

$85.99

b.

$27.58

c.

$51.22

d.

$152.20

Part 2

Based on the current market price of $50.68, you would ___________ of PKI.

Answer

a.

recommend the purchase of BCE

b.

not recommend the purchase of BCE

part 3

Based on your analysis, and your answers to the previous questions, what strategy would you recommend for each stock?

Answer

a.

Go short on both BCE and PKI

b.

Go Long on PKI and BCE

c.

Go short on PKI and long on BCE

d.

Go short on BCE and long on PKI