1. You are offered two stocks. The beta of A is 1.4 while the beta of B is 0.8. The growth rates of earnings and dividends are 10 percent and 5 percent, respectively. The dividend yields are 5 percent and 7 percent, respectively.
a) Since A offers higher potential growth, should it be purchased?
b) Since B offers a higher dividend yield, should it be purchased?
c) If the risk- free rate of return were 7 percent and the return on the market is expected to be 14 percent, which of these stocks should be bought?
Your broker suggests that the stock of QED is a good purchase at $ 25. You do an analysis of the firm, determining that the $1.40 dividend and earnings should continue to grow indefinitely at 5 percent annually. The firm’s beta coefficient is 1.34, and the yield on Treasury bills is 1.4 percent. If you expect the market to earn a return of 8 percent, should you follow your broker’s suggestion?
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The required return on an investment is 10 percent. You estimate that firm X’s dividends will grow as follows:
Year Dividend
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$1.20
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2.00
3 3.00
4 4.50
For the subsequent years you expect the dividend to grow but at the modest rate of 4 percent annually. What is the maximum price that you should pay for this stock?
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