Problem:
As an investor you have a required rate of return of 14 percent for investments in risky stocks. You have analyzed three risky firms and must decide which (if any) to purchase. Your information is
Firm A B C
Current Dividends $1.00 $3.00 $7.50
Expected Annual growth 7% 2% (-1%)
Current Market Price $23 $47 $60
a) What is the maximum price? Which (if any) should you buy?
b) If you bought stock A, what is your implied rate of return?
c) If your required rate of return were 10 percent, what should be the price necessary to induce you to buy Stock A?