Question

You are offered two stocks. The beta of A is 1.4 while the beta of B is 0.8. The growth rates of earnings and dividends are 10 percent and 5 percent, respectively. The dividend yields are 5 percent and 7 percent, respectively.

a) Since A offers higher potential growth, should it be purchased?

b) Since B offers a higher dividend yield, should it be purchased?

c) If the risk-free rate of return were 7 percent and the return on the market is expected to be 14 percent, which of these stocks should be bought?

Show how to work formulas within Excel to achieve the answers Please

Answer 1

> Riskfree Rate i.e. Rf = 7% Market Retum i.e. Rm= 14% b: Expected Return of the stock & E(R) = Rf + (RM-RF) B Ifor stock A :- ECR) = Rp + CRM E CR) = 7+ (14-7) 1.4 * ECR)= 16.8% for stock Bi- ECR) - 7+ 6CR) = 12.6 0 .8 (14-7 % o the expected return of stock A ů higher than stock B, therefore stock A should be bought . as Yes, since A offers higher potential growth, it should be pwechased but it should be kept in mind that! it also has a higher B which means it is a riskien asset. by Yes, B should be purchased, Be Positive