A.

Beta and Value A firm is expected to pay an annual dividend of $.80 next year. After next year the firms dividends will grow at a steady state rate of 6% per year. You are trying to value the stock and Value Line lists a stock beta of 1.92 while Yahoo is reporting a beta of 1.89. The stock is currently priced at $15.00. If E(R_M) Rf = 4.9% and the risk free rate is 3.6% the stock is ____________________ if you use the Value Line beta and is ____________________ if you use the Yahoo beta.

overpriced by $3.34; overpriced by $3.58

underpriced by $1.50; underpriced by $1.80

underpriced by $1.80; underpriced by $1.50

overpriced by $3.58; overpriced by $3.34

B.

Deferred Dividends Downloads for Cheap, Inc. has a new business that allows customers to download music and movies directly onto their IPhones or MP3 players in grocery stores. The downloaded items can be played on their TVs or computers at home. The firm is in the high growth phase and does not currently pay dividends. Managers are estimating that the firm will begin paying an annual dividend per share of $1.40 in four years and that dividends will then grow at 5% per year thereafter. What is the most you should be willing to pay for the stock today if the required return on the stock is 14%?

$9.64

$10.50

$9.00

$11.16