Your supervisor has asked you to evaluate the relative attractiveness of the stocks of two very similar

Question:

Your supervisor has asked you to evaluate the relative attractiveness of the of two very similar chemical companies: Litchfield Chemical Corp. (LCC) and Aminochem Company (AOC). AOC and LCC have June 30 fiscal year ends. You have compiled the data in Table 2-1 for this purpose. Use a one-year time horizon and assume the following:
€¢ Real gross domestic product is expected to rise 5 percent;
€¢ S&P 500 expected total return of 20 percent;
€¢ U.S. Treasury bills yield 5 percent; and
€¢ 30-year U.S. Treasury bonds yield 8 percent.

Litchfield Aminochem (AOC) Chemical (LCC) Current stock price $30 $50 Shares outstanding (millions) 10 20 Projected carn

a. Calculate the value of the common stock of LCC and AOC using the constant-growth DDM.
b. Calculate the expected return over the next year of the common stock of LCC and AOC using the CAPM.

Common Stock
Common stock is an equity component that represents the worth of stock owned by the shareholders of the company. The common stock represents the par value of the shares outstanding at a balance sheet date. Public companies can trade their stocks on... Stocks
Stocks or shares are generally equity instruments that provide the largest source of raising funds in any public or private listed company's. The instruments are issued on a stock exchange from where a large number of general public who are willing... Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...