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.

  • CreatedApril 28, 2015
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