Your supervisor has asked you to evaluate the relative attractiveness of the stocks 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.

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.

Litchfield Aminochem (AOC) Chemical (LCC) Current stock price $30 $50 Shares outstanding (millions) 10 20 Projected carnings per share (FY 1996) Projected dividend per share (FY 1996) $3.20 $4.00 $1.60 $0.90 Projected dividend growth tate 8% 7% Stock beta 1.2 1.4 Investors' required rate of return 10% 11% Balance shoet data (millions) Long-term debt Stockholders' equity $130 $100 $300 $320