Question

You are considering investing in B & B Inc's stock and your broker has told you that you can purchase it for $72. You require a return of 12% for this type of investment. The last dividend (Do) that B&B paid was $4 and a 6% constant growth rate is anticipated. Should you purchase B&B Inc?

1) Yes, because the expected return is greater than the required return
2) No, because the expected return is less than the required return
3) Cannot be determined without additional information
4) Not enough information given

Answer 1

The expected return is lower than the required return, so you should not purchase the B&B Inc stock.

Step-by-step explanation:

To determine whether you should purchase B&B Inc stock, we need to calculate the expected return on the investment and compare it to the required return. The expected return can be calculated using the dividend discount model (DDM), which takes into account the current dividend, the growth rate, and the required return. Using the DDM formula, we can calculate the expected return to be $4.328. Since the expected return of 4.328% is less than the required return of 12%, you should not purchase the B&B Inc stock.