Response to the following problem:
Let's assume that you're thinking about buying shares in Coast Electronics. So far in your analysis, you've uncovered the following information: the share pays annual dividends of $2.50 (and that's not expected to change within the next few years-nor are any of the other variables).
It trades at a P/E ratio of 18 times earnings and has a beta of 1.15. In addition, you plan on using a risk-free rate of 7% in the CAPM, along with a market return of 14%. You would like to hold the share for three years, at the end of which time you think the EPS will peak at about $7 a share. Given that the share currently trades at $70, use the IRR approach to find this security's expected return. Now use the present-value (dividends-and earnings) model to put a price on this share. Does this look like a good investment to you? Explain.