Consider two companies, named A and B, that are identical in every respect except that A will grow at 5% and B at 3%. Investors require a12% return for both companies, next year EPS are expected to be $1.00 for both companies and the dividend payout rate is 30%.
Part 1: What is the fair price of stock A?
Part 2: What is the price of stock A if you use P/E ratio of stock B to determine the price of stock A?