# Question

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 is as follows:

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 12, what is the maximum price the investor should pay for each stock? Would your answers be different if the appropriate P/E were 7?

d. What does stock C’s negative growth rate imply?

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 12, what is the maximum price the investor should pay for each stock? Would your answers be different if the appropriate P/E were 7?

d. What does stock C’s negative growth rate imply?

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