Question

Your broker recommends that you purchase Good Mills since it is trading at $35. The stock pays a $3.15 annual dividend (current dividend), which is expected to grow annually at 7 percent. If you want to earn 13 percent (required rate of return) on your funds, what is value of the stock and is this stock a good buy? $48.01: No $65.77: No $33.94: Yes $56.18:Yes $38.34:Yes

Answer 1

The value of the stock is $52.50 and it is a good buy.

Step-by-step explanation:

To calculate the value of the stock, we can use the dividend discount model. The formula for the value of a stock is the dividend divided by the required rate of return minus the dividend growth rate. In this case, the current dividend is $3.15 and the required rate of return is 13%. The dividend is expected to grow annually at 7%. So the value of the stock would be $3.15 / (0.13 - 0.07) = $52.50. Since the stock is trading at $35, it is undervalued and therefore a good buy.

Answer 2

To determine the value of the stock and whether it is a good buy, we need to calculate the present value of the stock's future dividend payments and the capital gain. The value of the stock is $52.50, and since it is trading at $35, it is considered a good buy as it is undervalued.

Step-by-step explanation:

To determine the value of the stock and whether it is a good buy, we need to calculate the present value of the stock's future dividend payments and the capital gain. The formula to calculate the present value of a growing perpetuity is PV = D/(r-g), where PV is the present value, D is the current dividend, r is the required rate of return, and g is the dividend growth rate.

In this case, the current dividend is $3.15, the required rate of return is 13%, and the dividend growth rate is 7%.

Using the formula, PV = $3.15/(0.13-0.07) = $52.50

Therefore, the value of the stock is $52.50. Since the stock is trading at $35, it is considered a good buy as it is undervalued.