What is the maximum price that the investor should pay

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Question - An investor with a required return of 12 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows:

Firm

A

B

C

Current earnings

$1.70

$3.30

$6.70

Current dividend

$0.90

$2.80

$7.80

Expected annual growth rate in dividends and earnings

6%

3%

-1%

Current market price

$21

$33

$60

A. What is the maximum price that the investor should pay for each stock based on the dividend-growth model?

B. If the investor does buy stock A, what is the implied percentage return?

C. If the appropriate P/E ratio is 15, what is the maximum price the investor should pay for each stock?

If the appropriate P/E ratio is 7, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent.

Reference no: EM132946899

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