Two stocks each currently pay a dividend of $1.90 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 0.8 while the beta coefficient of firm B is 1.06.

a. If U.S. Treasury bills currently yield 2 percent and you expect the market to increase at an annual rate of 8.7 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. Why are your valuations different? The beta coefficient of STOCK A OR STOCK B? is higher, which indicates the stock's return is LESS/MORE? volatile.

c. If stock As price were $49 and stock Bs price were $49, what would you do?

Stock A is OVERVALUED/UNDERVALUED? and SHOULD/SHOULD NOT? be purchased.

Stock B is OVERVALUED/UNDERVALUED? and SHOULD/SHOULD NOT? be purchased.