Question: Let s assume that you re thinking about buying stock in West
Let’s assume that you’re thinking about buying stock in West Coast Electronics. So far in your analysis, you’ve uncovered the following information: The stock pays annual dividends of $2.50 a share (and that’s not expected to change within the next few years—nor are any of the other variables). It trades at a P/E of 18 times earnings and has a beta of 1.15. In addition, you plan on using a risk-free rate of 7% in the CAPM, along with a market return of 14%. You would like to hold the stock for 3 years, at the end of which time you think EPS will peak at about $7 a share. Given that the stock currently trades at $70, use the IRR approach to find this security’s expected return. Now use the present value (dividends-and-earnings) model to put a price on this stock. Does this look like a good investment to you? Explain.
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