Final answer:
The expected rate of return for NCP's common stock is 15.98%, and based on a required rate of return of 11.2%, the stock's value is $72.50 per share. This suggests that at the current market price of $21.37, the stock is undervalued and could be a good investment.
Step-by-step explanation:
The common stock of NCP paid $1.45 in dividends last year and the dividends are expected to grow at a rate of 9.20 percent indefinitely. To find the stock's expected rate of return when the current market price is $21.37 per share, we can use the Gordon Growth Model: Expected Rate of Return = (Dividends Per Share / Current Market Price) + Dividend Growth Rate. This would be ($1.45 / $21.37) + 0.0920 = 0.0678 + 0.0920 = 0.1598 or 15.98 percent.
When calculating the value of the stock based on a required rate of return of 11.2 percent, the stock valuation formula again comes into play: Stock Value = (Dividends Per Share / (Required Rate of Return - Dividend Growth Rate)). This results in ($1.45 / (0.112 - 0.092)) = $1.45 / 0.02 = $72.50 per share as the value of the stock for an investor with this required rate of return.
For the decision on whether to make the investment, if the calculated value of $72.50 based on your required return is higher than the current market price of $21.37 per share, it suggests the stock is undervalued and could be a good investment. Conversely, if the value was lower, it might not be a wise investment.