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?

Question

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?

Quizplus · Accepted Answer

The Answer of 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?

Two Stocks Each Pay a $1 Dividend That Is Growing