Two stocks each pay a $1 dividend that is growing annually at 8 percent. Stock A's beta = 1.3; stock B's beta = 0.8.
a. Which stock is more volatile?
b. If Treasury bills yield 9 percent and you expect the market to rise by 13 percent, what is your risk-adjusted required return for each stock?
c. Using the dividend-growth model, what is the maximum price you would be willing to pay for each stock?