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# ABC Investment and Constant Dividend Growth Model Case Paper

300-500 words

Monica Dubois, an ABC investment advisor, has a new client, Mr. Jack Klein. Mr. Klein is a conservative investor who is interested in a required rate of return of 10% on his stock investments while assuming lower market risk. You are asked to help Monica make a suitable portfolio recommendation backed by risk-return calculations. The 3 possible stock choices for Mr. Klein and their respective betas are as follows:

 Stock Expected Return Beta ABC 10% 0.75 XYZ 11% 1.0 WHY 12% 1.25

Part I

Determine the expected returns and beta for a portfolio consisting of one third of Mr. Klein’s funds in each stock.

Part II

Assume the following:

• Each ABC stock pays current dividends of \$1.50 annually with 6% expected annual increases. The current market stock price for ABC is \$30 per share.
• Each XYZ stock pays current dividends of \$1.75 annually with 6% expected annual increases. The current market stock price for XYZ is \$27 per share.
• Each WHY stock pays current dividends of \$2.25 annually with 7% expected annual increases. Current market stock price for WHY is \$35 per share.

Complete the following for this assignment:

• Using the constant dividend growth model, determine whether ABC and WHY are over- or undervalued.
• For what types of companies is the constant growth model an appropriate analysis tool?
• What are the limitations of the constant growth model?