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	$	1.50	$	3.10	$	6.70
Current dividend	$	1.40	$	3.00	$	7.90
Expected annual growth rate in dividends and earnings		5%		2%		-1%
Current market price	$	25	$	36	$	65

a) 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: $________

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

_________ %

c) If the appropriate P/E ratio is 18, 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 9, 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: $________