3. An analyst gathers or estimates the following information about a stock: - Current price per...
3. An analyst gathers or estimates the following information
about a stock:
- Current price per share: $15.5
- Current annual dividend per share: $1.6
- Annual dividend growth for Years 1-3: 8%
- Annual dividend growth for Years 4+: 3%
- Required rate of return: 11%
Based on the DDM, the stock is most likely:
A. undervalued. B. overvalued. C. fairly valued.
Please Don't solve it in Excel.
Homework Answers
Answer
Stick price using DDM dividend discount model.
Current dividend( D0)=1.6
Annual dividend growth upto 3 years=8%
Therefore
D1( dividend after 1 year)=1.6(1+0.08)=1.728
D2( dividend after 2 year)=1.728(1+0.08)=1.866
D3(dividend after 3 years)=1.866(1+0.08)=2.015
P3( price after 3 years)=
Price = D3(1+g)/(Re- g)=2.015(1.04)/(11-4)=29.9 approx
Re= Required rate of return=11%
growth after 3 years=4%
Therfeore price of stock is 29.9 as per dividend discount model.
current price per share=15.5
Based on DDM stock is undervalued.
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