The first stock pays a current dividend of $2 which is growing at 3% per year....

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The first stock pays a current dividend of $2 which is growing at 3% per year....

The first stock pays a current dividend of $2 which is growing at 3% per year. The cost of equity is 9% and the WACC is 7%. Based on this info what should you do if the stock is trading at $29.50 a share?

a. Buy it as the intrinsic value of the stock is just over $34

b. Short or sell the stock as the intrinsic value of the stock is under $26 a share

c. Buy it as the intrinsic value is $33.33

d. Buy is as the intrinsic value is just over $51

business finance

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Answer 1

Answer #1

The intrinsic value of the stock = Div0*(1+g)/(r - g)

The intrinsic value of the stock = 2*1.03/(0.09 - 0.03)

The intrinsic value of the stock = $34.3333333333

The intrinsic value of the stock > current price of the stock. So the stock is undervalued.

The correct answer is a. Buy it as the intrinsic value of the stock is just over $34

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Answer 2

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The first stock pays a current dividend of $2 which is growing at 3% per year....

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