Finance

1. You are offered two 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 percent and 5 percent, respectively. The dividend yields are 5 percent and 7 percent, 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 percent and the return on the market is expected to be 14 percent, which of these stocks should be bought?

 Your broker suggests that the stock of QED is a good purchase at $ 25. You do an analysis of the firm, determining that the $1.40 dividend and earnings should continue to grow indefinitely at 5 percent annually. The firm’s beta coefficient is 1.34, and the yield on Treasury bills is 1.4 percent. If you expect the market to earn a return of 8 percent, should you follow your broker’s suggestion?

1.  

2. The required return on an investment is 10 percent. You estimate that firm X’s dividends will grow as follows:                  

   Year                  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 modest rate of 4 percent annually. What is the maximum price that you should pay for this stock?