dividendss

Question

You are considering two stocks.  Both pay a dividend of $1, but the beta coefficient of A is 1.5 while the beta coefficient of B is 0.7.  Your required return is k = 8% + (15% - 8%) B.

 

a.) What is the required return for each stock?

b.) If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 5 percent?

c.) The earnings and dividends of B are expected to grow annually at 10 percent.  Would you buy the stock for $30?

d.) If the earnings and dividends of A were expected to grow annually at 10 percent, would it be good buy at $30?

Answer 1

a

A: 0.08 + 1.5(0.07) = 0.185

B: 0.08 + 0.7(0.07) = 0.129

 

b

Expected price = 1/(0.185-0.05) = 7.41

Since the actual price is $10, it is not a good buy.

 

c

Expected price = 1/(0.129-0.1) = 34.48

Since the actual price is $30, the stock should be bought.

 

d

Expected price = 1/(0.185-0.1) = 11.76

Since the actual price is $30, it is not a good buy.