Problem 11-08

Two stocks each currently pay a dividend of $1.30 per share. It is anticipated that both firms dividends will grow annually at the rate of 2 percent. Firm A has a beta coefficient of 0.82 while the beta coefficient of firm B is 1.24.

a) If U.S. Treasury bills currently yield 6 percent and you expect the market to increase at an annual rate of 8.9 percent, what are the valuations of these two stocks using the dividend-growth model? Do not round intermediate calculations. Round your answers to two decimal places.

Stock A: $________

Stock B: $________

b) The beta coefficient of ________(stock A/stock B) is higher, which indicates the stock's return is ________(less/more) volatile.

c) Why are your valuations different?

Stock A is ________(undervalued/overvalued) and ______(should/should not) be purchased.

Stock B is ________(undervalued/overvalued) and _______(should/should not) be purchased.