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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?


Definitions:

Factory Overhead

Indirect costs associated with manufacturing, such as utilities, maintenance, and manager salaries, not directly traceable to specific units of production.

Work In Process Inventory

Refers to the inventory that has begun the manufacturing process but is not yet completed.

Processing Department

A division within a manufacturing facility where a specific operational task or series of tasks is performed to convert raw material into finished goods or semi-finished goods.

Job Order Cost Cards

Documents used to record and track the materials, labor, and overhead costs assigned to individual jobs or batches in production.

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