An investor with a required return of 14 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information as follows: Firm A B Current earnings $2.10 $3.50 $6.80 Current dividend $1.70 $4.30 $8.10 Expected annual growth rate in 5% 3% -3% dividends and earnings Current market price $ 25 $ 48 $ 54 a. What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ b. If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % c. If the appropriate P/E ratio is 15, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the appropriate P/E ratio is 6, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $
An investor with a required return of 14 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information as follows: Firm A B Current earnings $2.10 $3.50 $6.80 Current dividend $1.70 $4.30 $8.10 Expected annual growth rate in 5% 3% -3% dividends and earnings Current market price $ 25 $ 48 $ 54 a. What is the maximum price that the investor should pay for each stock based on the dividend-growth model? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ b. If the investor does buy stock A, what is the implied percentage return? Round your answer to two decimal places. % c. If the appropriate P/E ratio is 15, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $ If the appropriate P/E ratio is 6, what is the maximum price the investor should pay for each stock? Round your answers to the nearest cent. Stock A: $ Stock B: $ Stock C: $
Managerial Accounting
15th Edition
ISBN:9781337912020
Author:Carl Warren, Ph.d. Cma William B. Tayler
Publisher:Carl Warren, Ph.d. Cma William B. Tayler
Chapter16: Financial Statement Analysis
Section: Chapter Questions
Problem 2MAD
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