You are considering buying 100 shares of TEXAS INC common stock. The common stock is expected to pay a dividend of $2.50 a year from today; the growth rate of the dividends is 8% for two years, then level off to a constant rate of 5% per year. The correlation between TEXAS Inc and the market is .75; the variance of the market’s return is expected to be 20% and the standard deviation of Texas Inc returns is 13%. It is also estimated that the return on the TSX/S&P is 7% and the return on government of Canada T-Bills is 3%. Should you buy the shares if the current market price of the company common stock is $35.00? Show your work.

To determine whether you should buy the shares of TEXAS Inc common stock, we can calculate the expected return and compare it with the required rate of return.

1. Calculate the expected dividend in each year:
- Year 1: $2.50
- Year 2: $2.50 * (1 + 8%) = $2.70
- Year 3 onwards: $2.70 * (1 + 5%) = $2.83

2. Determine the present value of the expected dividends. We'll assume a required rate of return of 7% (return on the TSX/S&P):
- Present value of Year 1 dividend: $2.50 / (1 + 7%) = $2.33
- Present value of Year 2 dividend: $2.70 / (1 + 7%)^2 = $2.36
- Present value of Year 3 onwards dividend: $2.83 / (0.07 - 0.05) = $141.50

3. Calculate the expected price at the end of Year 3 using the constant growth dividend model:
- Year 3 dividend: $2.83
- Required rate of return: 7% (return on the TSX/S&P)
- Constant growth rate: 5%
- Price at the end of Year 3 = $2.83 * (1 + 5%) / (7% - 5%) = $182.25

4. Calculate the expected return on the shares:
- Initial investment: 100 shares * $35.00 per share = $3,500.00
- Present value of expected dividends: $2.33 + $2.36 + $141.50 = $146.19
- Expected price at the end of Year 3: $182.25
- Expected total future value = Present value of dividends + Expected price at the end of Year 3 = $146.19 + $182.25 = $328.44
- Expected return = (Expected total future value - Initial investment) / Initial investment = ($328.44 - $3,500.00) / $3,500.00 = -90.45%

5. Compare the expected return with the required rate of return:
- The expected return of -90.45% is significantly lower than the required rate of return of 7%.

Based on the calculations, it seems like buying the shares of TEXAS Inc common stock would not be a good investment decision. The expected return is much lower than the required rate of return, indicating that the shares are overpriced at the current market price of $35.00.