Question

DAA's stock is selling for $15 per share. The firm's income, assets, and stock price have been growing at an annual 15 percent rate and are expected to continue to grow at this rate for 3 more years. No dividends have been declared as yet, but the firm intends to declare a dividend of D3 = $2.00 at the end of the last year of its supernormal growth. After that, dividends are expected to grow at the firm's normal growth rate of 6 percent. Will you buy this stock? Why?

Answer 1

To determine whether to buy DAA's stock, we need to consider the expected future dividends and growth rate. By calculating the present value of future dividends using the discounted cash flow (DCF) method, we can determine if the stock is undervalued or overvalued. More information is needed to make an informed decision.

Step-by-step explanation:

To determine whether to buy DAA's stock, we need to consider the expected future dividends and the growth rate. The company's income, assets, and stock price have been growing at a 15% annual rate and are projected to continue growing at this rate for the next 3 years. After the 3 years of supernormal growth, the dividend is expected to be $2.00 per share, and dividends will grow at a normal growth rate of 6%.

To decide if the stock is worth buying, we can calculate the present value of all future dividends using the discounted cash flow (DCF) method. The DCF method discounts future cash flows to their present value by using an appropriate discount rate. By summing the present value of future dividends, we can compare it with the stock price to determine if the stock is undervalued or overvalued. If the present value of future dividends is greater than the stock price, it may be a good buy.

Overall, to make an informed decision, we need more information about the discount rate and other relevant factors.

Answer 2

This question is incomplete since the required return is not pasted here. I checked on the web and found similar question with the firm's required rate of return is 18 percent. You can use this to solve the question as follows.

Step-by-step explanation:

Use Dividend Discount Model (DDM) to find the intrinsic value of the stock.

Find the present value of dividends

D3 = 2

PV(of D3) = 2/(1.18^3) = 1.2173

D4 = D3(1+g) = 2(1+0.06) = 2.12

PV(of D4) =
`((2.12)/(0.18-0.06) )/(1.18^(3) )`

PV (of D4) = 17.6667/ 1.6430 = 10.7527

Next, sum up the present values ;

= 1.2173 + 10.7527

= $11.97

Therefore, DAA's stock is currently overpriced ,so you should not buy it since it is only valued at $11.97 and not $15.