Solve Please 1. Your broker recommends that you purchase Good Mills at $30. The

Question

Solve Please

1. Your broker recommends that you purchase Good Mills at $30. The stock pays a $2.20 annual dividend, which (like its per share earnings) is expected to grow annually at 8 percent. If you want to earn 15 percent on your funds, is this stock a good buy and why? Show your work.   

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1- A-. If you purchase Large Oil, Inc. for $36 and the firm pays a $3.00 annual dividend which you expect to grow at 7.5 percent, what is the implied annual rate of return on your investment?

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Explanation / Answer

Answer to 1 ke = D1/P0 +g Ke = 2.2/30 +8% = 15.3% Required rate of return = 15%. Therefore its better to buy the stock as cost of equity is higher than required rate of return. Answer to 1 A ke = D1/P0 +g Ke = 3/36 +7.5% = 15.83%

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