Reference no: EM132532681

An investor with a required return of 15 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                       $1.90         $3.50         $7.30

Current dividend                          $1.10         $2.30       $7.20

Expected annual growth rate in         8%              1%             -3%

dividends and earnings

Current market price                           $18              $20                   $41

Question 1: 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: $

Question 2: If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places.

Question 3: If the appropriate P/E ratio is 11, 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: $

Question 4: If the appropriate P/E ratio is 3, 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: $