Homework Answers
Solution :-
Given D0 = $1.20
Growth Rate (g) = 6.5%
Required Return ( ke ) = 12%
Now Fair Price of stock = D0 * ( 1 + g ) / ( ke - g )
P = $1.20 * ( 1 + 0.065 ) / ( 0.12 - 0.065 )
P = $23.24
Now Fair Price of Stock is $23.24
General Rule :-
If Fair Price > Actual Price , Buy the share
If Fair Price = Actual Price , Hold the share
If Fair Price < Actual Price , Do not Purchase the share
Therefore if Price is $20 Purchase the stock , as Worth of share is more than its price
And if Price is $30 Do not Puchase the Stock , as Worth of share is less than its price
If there is any doubt please ask in comments
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