Question

Vcast, Inc., is expected to grow at a constant rate of 9 percent. The company will pay a dividend of $2.75 next year and the current price of the stock is $29.5. If investors require a return of 18% on similar stocks, how much is the stock worth and is it a good buy?

a. No, it is not a good buy because the stock is worth $30.56
b. No, it is not a good buy because the stock is
worth $9.50
c. Yes, it is a good buy because the stock is worth $30.56
d. None of these are correct.

Answer 1

The stock is worth $30.56, and it is a good buy.

Step-by-step explanation:

To calculate the value of the stock, we can use the constant growth dividend model. The formula for this model is:

Stock Price = Dividend / (Required Rate of Return - Growth Rate)

Using the given information:

Dividend = $2.75

Growth Rate = 9%

Required Rate of Return = 18%

Stock Price = $2.75 / (0.18 - 0.09) = $30.56

Therefore, the stock is worth $30.56. Since the current price of the stock is $29.5, it is below its true value and would be considered a good buy.