The risk-free rate is 8% and the expected return on the market is 16%. As an analyst, you are preparing a recommendation report on the following two stocks:

                                                                                        Stock S                                 Stock B

                Beta                                                                       0.85                                        1.35

                Expected dividend next year                             $1.10                                      $4.00

                Growth rate (g)                                                     8%                                          6%

                Current Price (p0)                                                $22                                         $30.77

A. Which stocks would you recommend to buy or sell?? Explain.

B. Following up on the above, draw the security market line showing the expected and required rates of return.

C. Following up on the above, assume you are asked to evaluate two more stocks, T and C. Stock T has a beta of 0.85 and is currently selling for $45. It is expected to pay a dividend of $1.25 and sell at the end of the year for $50. Stock. Stock C has a beta of 1.35 and is expected to pay no dividends. It is currently trading at $67 and will sell at the end of the year for $82. Which stock will you recommend? What should be the price of stocks T and C for it to be in equilibrium (“hold” recommendation).

D. From a company's perspective, what are the advantages and disadvantages of issuing debt, preferred stock and common stock. Explain.