Problem 1) You are offered 2 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% and 5, respectively. The dividends yields are 5% and 7 %, 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 % and the return on the market is expected to be 14%, which of these stocks should be bought?
Problem 2) Your broker suggests that the stock of QED is a good purchase @ $25. Yu do an analysis of the firm, determining that the $1.40 dividend and earnings should continue to grow indefinitely at 8% annually. The firm’s beta coefficient is 1.34, and the yield on Treasury bills is 7.4 percent. If you expect the market to earn a return of 12 %, should you follow your broker’s suggestion?
Problem 3) The required return on an investment is 12%. You estimate that firm X’s dividend will grow as follows:
Yield Dividend
1 $1.20
2 2.00
3 3.00
4 4.50
For the subsequent years you expect the dividend to grow but at the more modest rate of 7% annually. What is the maximum price that should pay for this stock?
Problem 4) Management has recently announced that expected dividends for the next three years will be as follows:
Yield Dividend
1 $2.50
2 3.25
3 4.00
For the subsequent years, management expects the dividend to grow at 5% annually. IF the risk-free is 4.3 % percent, the return on the market is 10.3 %, and the firm’s beta is 1.4, what is the maximum price that you should pay for this stock?
Problem 5). Management has recently announced that expected dividends for the next three years will be as follows:
Yield Dividend
1 $3.00
2 2.25
3 1.50
The firm’s assets will then be liquidated and the proceeds invested in the preferred stock of other firms so that the company will be able to pay an annual dividend of $1.25 indefinitely. If you required return on investment in common stock is 10%, what is the maximum you should pay for this stock?