1.You are considering buying four stocks. You want to buy the one that trades

1.You are considering buying four stocks. You want to buy the one that trades most below its fair
P0/B0. Given the data below if you can just buy one stock which one should you buy?

Stock

Payout Ratio

Long-term Growth Rate

Cost of Equity Capital

ROE0

Current P0/B0

A

50%

10.0%

13%

10%

2.0

B

60%

5.5%

8%

12%

2.2

C

40%

3.5%

7%

8%

0.8

D

100%

0%

6%

7%

2.0

Hint: You should buy the one where the P0/B0 is furthest below what the P/B should be (the fair P/B). For instance if
the fair P/B is 10% higher than P0/B0 then the stock should rise 10% as it moves to fair value (P rises while B is unchanged so the P/B
ratio rises). Stock investors frequently analyze the P/B ratio to determine whether or not to buy a security.

a)A

b)B

c)C

d)D