Problem 11-03

An investor with a required return of 12 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows:

Firm A B C Current earnings $ 1.70 $ 2.80 $ 7.30 Current dividend $ 0.80 $ 3.10 $ 8.30 Expected annual growth rate in 6 % 2 % -3 % dividends and earnings Current market price $ 19 $ 35 $ 58 What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent. Stock A: $

Stock B: $

Stock C: $

If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. %

If the appropriate P/E ratio is 16, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $

Stock B: $

Stock C: $

If the appropriate P/E ratio is 5, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $

Stock B: $

Stock C: $