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Valuing Stocks using the DDM Review the dividend discount model w/ risk presented in chap 8...

Valuing Stocks using the DDM

Review the dividend discount model w/ risk presented in chap 8 of the text.

You are thinking about investing in stock in company XYZ which paid a dividend of $10 this year & whose dividends you expect to grow at 4% per year. The risk free (rf) rate is 3% & you require a risk premium (rp) of 5%. If the price of stock in the market is $200 a share, should you buy the stock?

Looking at your computation, what might account for the difference you computed & the current market price of $200?

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Calculate the current price of the stock as follows 1 a Particulars 2 Dividend 3 Growth rate 4 Required rate 5 Market value Amount 10 0% 8% 260 Here, the market price is $260, but in market it is trading at S200 So, it preferable to buy the stock at S200 The difference amount is $260-$200-560 Formulas 1 a Particulars 2 Dividend 3 Growth rate 4 Required rate 5 Market value Amount 10 0.04 3%+5% (C2* (1+C3)/(C4-C3)

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