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Question - An investor with a required return of 12 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
$1.70
$3.30
$6.70
Current dividend
$0.90
$2.80
$7.80
Expected annual growth rate in dividends and earnings
6%
3%
-1%
Current market price
$21
$33
$60
A. What is the maximum price that the investor should pay for each stock based on the dividend-growth model?
B. If the investor does buy stock A, what is the implied percentage return?
C. If the appropriate P/E ratio is 15, what is the maximum price the investor should pay for each stock?
If the appropriate P/E ratio is 7, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent.
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