You are considering two stocks

a) What is the required return for each stock?

You need to replace the beta coefficient for each stock in B of the equation.

For Stock A, the required return is

k = 8%+(15%-8%)1.5
k = 18.5%

For Stock B, the required return is

k = 8%+(15%-8%)0.7
k = 12.9%

b) If A is selling for $10 a share, is it a good buy if you expect earnings and dividends to grow at 5 percent?

We can find the appropriate stock price by using the following equation.

P = D0(1 + g) where D0 is the dividend this year
(k - g) k is the required rate of return
g is the growth rate

Stock A

P = 1(1 + 0.05)
(0.185 - 0.05)

P = 7.78

The appropriate price is $7.78 a share. So, it is not a good buy if earnings and dividends is expected to grow at 5 percent.

c) The earnings and dividends of B are expected to grow annually at 10 percent. Would you buy the stock for $30?

Stock B

P = 1(1 + 0.10)
(0.129 - 0.10)

P = 37.93

The appropriate price is $37.93 a share. So, I would buy the stock for $30.

d) If the earnings and dividends of A were expected to grow annually at 10 percent, would it be a good buy at $30?

Stock A

P = 1(1 + 0.10)
(0.185 - 0.10)

P = 12.94

The appropriate price is $12.94 a share. So, it is not a good buy at $30.