The next expected dividend for Stock P is $2.5, and the current price of the stock is $32.5. Its earnings, dividends, and price can be expected to grow at a constant rate of 4 percent per year. The risk free rate is 3%, the market risk premium is 5.5%, and the stock’s beta is 1.2. Based on the given information, which of the following statements is correct?

A. ​An investor should not buy this stock because its expected rate of return is 9.6%, and its required rate of return is 11.69%.
B. ​ An investor should buy this stock because its expected rate of return is 11.69%, and its required rate of return is 9.6%
C. ​An investor should buy this stock because its expected rate of return is 12.54%, and its required rate of return is 8.28%,
D. ​An investor should not buy this stock because its expected rate of return is only 8.28%, and its required rate of return is 12.54%
E. ​An investor should be indifferent toward buying or selling the stock, because its required rate of return is equal to its expected rate of return.

ANSWER:

B. ​ An investor should buy this stock because its expected rate of return is 11.69%, and its required rate of return is 9.6%