Question

Question 7: (10 points). (Common stock valuation) The common stock of NCP paid $1.29 in dividends last year. Dividends are expected to grow at an annual rate of 6.00 percent for an indefinite number of years. (Round to the nearest cent.) a. If your required rate of return is 8.70 percent, the value of the stock for you is:$ b. You (should/should not) make the investment if your expected value of the stock is (greater/less) than the current market price because the stock would be undervalued.

Answer 1

value of stock = d1/(r-g)

where d1 = expected dividend = d0*(1+g)

d0 = current dividend paid

g = growth rate of dividend

r = required rate of return

if this value < current market price , the stock is overvalued

if the above value > current market price , the stock is undervalued