Stock A and stock B have just paid an annual dividend of $6. The dividend is expected to grow at an annual rate of 3%. Stock A has a beta of 0.7 and stock B has a beta of 1.2.

The risk-free rate is 3% and the expected return on the market portfolio is 8%.

Part 1

What is the value of stock A?

Part 2

What is the value of stock B?

Part 3

If stock A has a market price of $180 and stock B has a market price of $101, what investment makes sense?

Buy both stocks

Buy stock A, since it has a higher market price

Buy stock A, since it has a higher value.

Buy stock B, since it has a lower market price

Buy stock B, since its value is more than its market price.

Buy neither stock