Problem 11-03

An investor with a required return of 16 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	$	3.50	$	7.00
Current dividend	$	0.90	$	2.30	$	6.90
Expected annual growth rate in		8	%	1	%	-2	%
dividends and earnings
Current market price	$	13	$	19	$	46

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 10, 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 4, 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: $ _________