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.
Answer to relevant QuestionsThe price of Myrtle’s Plumbing Supply Co. is now $80. The company pays no dividends. Ms. Bossard expects the price 4 years from now to be $110 per share. Should she buy Myrtle’s Plumbing stock if she desires a 10% rate ...Assume a major investment service has just given Oasis Electronics its highest investment rating, along with a strong buy recommendation. As a result, you decide to take a look for yourself and to place a value on the ...Granger Toothpaste Corp. has total equity of $400 million and 100 million shares out-standing. Its ROE is 20%. Calculate the company’s EPS. What is the random walk hypothesis, and how does it apply to stocks? What is an efficient market? How can a market be efficient if its prices behave in a random fashion? Describe the confidence index, and note the feature that makes it unique.
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