The common shares of Trenton Ltd., which are currently trading at $12.50, paid a dividend of $1.50
Question:
The common shares of Trenton Ltd., which are currently trading at $12.50, paid a dividend of $1.50 per share during the past year. Investment analysts have informed you that the historical growth rate for its common share dividends of 2% is expected to continue for the foreseeable future, that the firm's beta is 1.7, and that reasonable estimates for the risk-free rate of return and the expected market return are 3% and 9%, respectively.
Alternatively, the common shares of Bellville Inc. have a current market price of $10 per share and investment analysts have informed you that the share price is expected to be $10.50 in 1 year, that the shares are expected to pay a dividend of $1 per share over the next year, and that their beta is 0.75.
Should you invest in the common shares of Trenton or the common shares of Bellville? Explain and support your answer with calculations?
Advanced Financial Accounting
ISBN: 978-0137030385
6th edition
Authors: Thomas Beechy, Umashanker Trivedi, Kenneth MacAulay