Ch. 8 - 5

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 $4.52 a share indefinitely. It trades at a P/E of 8.9 times earnings and has a beta of 1.14. In addition, you plan on using a risk-free rate of 5.00% in the CAPM, along with a market return of 11%. You would like to hold the stock for 3 years, at the end of which time you think EPS will be $8.89 a share. Given that the stock currently trades at $52.21, use the IRR approach to find this security's expected return. Now use the dividend valuation model (with constant dividends) to put a price on this stock. Does this look like a good investment to you? Explain.

This security's expected return (IRR) is ______ (Round to two decimal places.)