Riskfree Rate: 3% Market Rate 0.11 beta = 0.95 expected dividend = $5.82 next year growth...

Question

Question

Riskfree Rate:	3%
Market Rate	0.11

beta = 0.95

expected dividend = $5.82 next year

growth rate = 8%. If it’s

trading per share = $201.10

over or under valued? Show formula

business finance

Answer 1

Answer #1

Under valued

Working:

As per dividend discount model,
Current Value of stock		=	D1/(Ke-g)	Where,
		=	5.82/(0.1060-0.08)	D1	Expected Dividend	$ 5.82
		=	$ 223.85	Ke	Discount rate	10.60%
				g	Growth rate	8%

Stock is trading at $ 201.10 which is below $ 223.85.
So, this stock is undervalued.


Working:

Discount factor	=	Risk Free rate +Beta*(Market return - Risk Free rate)
	=	3%+0.95*(11%-3%)
	=	10.60%

Answer 2

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