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Problem 11-08

Two stocks each currently pay a dividend of $1.40 per share. It is anticipated that both firms dividends will grow annually at the rate of 6 percent. Firm A has a beta coefficient of 0.94 while the beta coefficient of firm B is 1.19.

Stock A: $

Stock B: $

The beta coefficient of -Select-stock Astock BItem 3 is higher, which indicates the stock's return is -Select-lessmoreItem 4 volatile.

Stock A is -Select-undervaluedovervaluedItem 5 and -Select-shouldshould notItem 6 be purchased.

Stock B is -Select-undervaluedovervaluedItem 7 and -Select-shouldshould notItem 8 be purchased.

1. If U.S. Treasury bills currently yield 4.8 percent and you expect the market to increase at an annual rate of 9 percent, what are the valuations of these two stocks using the dividend-growth model? Do not round intermediate calculations. Round your answers to two decimal places.
2. Why are your valuations different?
3. If stock As price were $57 and stock Bs price were $59, what would you do?