Question

Both questions..

Vixon's stock is selling for $8.94 per share. The firm's income, assets, and stock price have been growing at an annual 15 percent rate and are expected to continue to grow at this rate for 3 more years. No dividends have been declared yet, but the firm intends to declare a dividend of D3 = $2.00 at the end of the last year of its supernormal growth. After that, dividends are expected to grow at the firm's normal growth rate of 6 percent. The firm's required rate of return is 18 percent. The stock is Undervalued by $3.03. Overvalued by $3.03. Overvalued by $2.42. Overvalued by $2.25 Undervalued by $2.25 QUESTION 33 Wally Inc stock has an expected return of 9 percent and a standard deviation of 12 percent. What is the coefficient of variation for Wally? Set your calculator to at least 4 decimal places. 0.0.13 0.0600 1.6667 1.3333 Cannot be determined

Answer 1

Solution :- 1

First Calculate (P3) Price after 3 years =

D4 = D3*(1+g) = $2 * (1 + 0.06) = $2.12

Ke = (Cost of Equity) = 18%

g = 6%

Now P3 = D4 / (ke - g) = $2.12 / (18% - 6%) = $17.667

Now Price of Stock today = (D3 + P3) / (1 + ke)³ = ($2 + $17.667) / (1 + 0.18)³

= $19.667 * 0.6086 = $11.97

Fair Price of stock = $11.97

Actual Price of Stock = $8.94

Therefore Stock is Undervalued by $11.97 - $8.94 = $3.03

Therefore the Correct answer is (A)

Solution :- (2)

Coefficient of Variation (CV) = (Sd / Mean)

CV = 12% / 9% = 1.3333

Therefore the correct answer is (D)