Two Stocks Each Pay a $1 Dividend That Is Growing

question 35

Essay

Two stocks each pay a $1 dividend that is growing annually at 8 percent. Stock A has a beta of 1.3; stock B's beta is 0.8.

a. Which stock is more volatile?

b. If treasury bills yield 6 percent and you expect the market to rise by 12 percent, what is your risk-adjusted required rate of return?

c. Using the dividend-growth model, what is the maximum amount you would be willing to pay for each stock?

d. Why are your valuations different?

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