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An analyst gathers or estimates the following information about a stock: - Current price per share:...

An analyst gathers or estimates the following information about a stock: -

Current price per share: $15.5

Current annual dividend per share: $1.6

Annual dividend growth for Years 1-3: 8%

Annual dividend growth for Years 4+: 3%

Required rate of return: 11%

Based on the DDM, the stock is most likely:    A. undervalued. B. overvalued. C. fairly valued.

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Answer #1

Calculate the current price as follows 1 YearParticulars Amount PVF@ 11% PV of amount $1.5568 $1.5147 $1.4737 $25.95010.73119$18.9745 1 Dividend 2 Dividend 3 Dividend 3 Price $1.7280 $1.86620.81162 $2.0155 0.90090 4 0.73119 Current price $23.52 Therefore, the current price is $23.52 Given current price is S15.5 but calculated current price is S23.52. Therefore, the stock is undervalued. Formulas 1 Year Particulars Amount 2 1 Dividend 1.6* (1+8%)AA2 32 Dividend |-1.6*(1+8%)*A3 43 |Dividend 1.6*(1+896)*A4 5 3 Price PV of amount PVF @ 11% -1/(1+11%)A2-C2* D2 -1/(1+11%)*A3-C3*D3 -1/(1+11%)A4-C4*D4 -(C4*(1+3%))/(11%-396) |-1/(1+11%)A5-C5 * D5 Current price SUM(E2:E5)

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