eBookProblem 11-03An 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$2.50$3.20$6.60 Current dividend$1.40$2.30$7.50 Expected annual growth rate in 5%2%-2%dividends and earnings Current market price$29$28$59 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: $ If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % If the appropriate P/E ratio is 13, 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: $ 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.Stock A: $ Stock B: $ Stock C: $

We will use the dividend growth model to find the prices of stock A, Stock B, and Stock C. We will…

Answered: An investor with a required return of…

Fundamentals of Financial Management (MindTap Course List)

15th Edition

ISBN:9781337395250

Author:Eugene F. Brigham, Joel F. Houston

Publisher:Eugene F. Brigham, Joel F. Houston

Chapter15: Distributions To Shareholders:dividends And Share Repurchases

Section: Chapter Questions

Problem 8P: ALTERNATIVE DIVIDEND POLICIES Rubenstein Bros. Clothing is expecting to pay an annual dividend per...

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Problem 11-03

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	$	2.50	$	3.20	$	6.60
Current dividend	$	1.40	$	2.30	$	7.50
Expected annual growth rate in		5	%	2	%	-2	%
dividends and earnings
Current market price	$	29	$	28	$	59

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: $

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

If the appropriate P/E ratio is 13, 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: $

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.

Stock A: $

Stock B: $

Stock C: $

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