Question

The security market line is estimated to be pent. The beta of B 1.3. The more (11.1% ) You are considering two stocks. The beta Ais . The more dividend ved during the year of percent and a growth rate dividend yield during the year of 7.2 percent and a growth rate of 6.7 percent. a. What is the required return for each security? Round your answers to two decal places Stock: h. Why are the required rates of return different The difference in the regured rates of return is the result of c. Since A offers higher potential growth, should it be purchased d. Since offers higher dividend vield, should it be patch Stock Select be purchased e. Which stocks should be purchased - should be purchased

Answer 1

1.
=8%+(11.1%-8%)*1.8
=13.58000%

2.
=8%+(11.1%-8%)*1.3
=12.03000%

3.
Stock A as it has higher beta

4.
Should not
Expected return for A=Dividend yield+growth rate=7.2%+6%=13.2%
As expected return is less than required return, it should not be purchased

5.
Should
Expected return for A=Dividend yield+growth rate=7.2%+6.7%=13.9%
As expected return is more than required return, it should be purchased