Question

You are currently thinking about investing in a stock valued at $25 per share. The stock recently paid a dividend of $2.40 and its dividend is expected to grow at a rate of 5 percent for the foreseeable future. You normally require a return of 14 percent on stocks of similar risk. Is the stock overpriced, underpriced, or correctly priced? (Round answer to 2 decimal places, e.g. 52.75.)

Answer 1

as the market value $25 is lower than the stock price $28

so it is under priced

Step-by-step explanation:

given data

stock valued = $25 per share

dividend = $2.40

grow rate = 5 percent

return = 14 percent

solution

we know that stock price today is express as

stock price = current dividend × ( 1+ growth rate ) ÷ (normal required rate of return - growth rate ) ...............................1

stock price = 2.40 × ( 1+ 5% ) ÷ (14% - 5% )

stock price = $28

as the market value $25 is lower than the stock price $28

so it is under priced