Question

LED​ Corp.'s common stock paid​ $2.50 in dividends last year ​(D0​). Dividends are expected to grow at a 12minuspercent annual rate forever. If​ LED's current market price is​ $40.00, and your required rate of return is 23​ percent, should you purchase the​ stock?

Answer 1

No, you should not purchase the stock as the stock is over priced.

Step-by-step explanation:

Stock Price should be

Stock Price = Dividend last year / Required Rate of Return

= $2.50 / 23%

= $10.86

The current market price of the stock is $40 so the stock is over priced as it is $10.86 that is why you should not purchase the stock.