Two stocks each currently pay a dividend of $1.75 per share. It is anticipated that both firms’ dividends will grow annually at the rate of 8 percent. Firm A has a beta coefficient of 0.88 while the beta coefficient of firm B is 1.35.
a. If U.S. Treasury bills currently yield 6.4 percent and you expect the market to increase at an annual rate of 12.1 percent, what are the valuations of these two stocks using the dividend-growth model?
b. Why are your valuations different?
c. If stock A’s price were $51 and stock B’s price were $42, what would you do?

  • CreatedMarch 19, 2015
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