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Homework answers / question archive / 8-An investor with a required return of 10 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase

8-An investor with a required return of 10 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase

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8-An investor with a required return of 10 percent for very risky investments in common stock has analyzed three firms and must decide which, if any, to purchase. The information is as follows: 

                                                                McD             KFC           W 

Current Earnings                                      $2.00         $3.00        $6.50 

Current Dividend                                      $1.20          $2.80        $7.00 

Expected annual growth rate                     5%             3%            -2% 

Current share prices                                 $25              $48          $75 

a) What is the maximum price that the investor should pay for each stock based on the dividend-growth model? 

b) If the investor does buy stock McD, what is the implied percentage return? 

c) If the appropriate P/E ratio is 12, what is the maximum price the investor should pay for each stock? Would your answers be different if the appropriate P/E were 7? 

d) What does stock W's negative growth rate imply? 

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