Question

you observe thundering herd common stoc k selling for $40.00 per share. the next dividen is ecoected to be $2.00, and is expected to grow at a 4% annual rate forever. If your requir4ed rate of return is 12%, you should purchase the stock? A. Yes, because the presemt value of the expected future cash flows is greater than $40 g

Answer 1

no, because the present value of the expected future cash flows is less than $40

Step-by-step explanation:

The computation of the share price present value is given below:

= Next dividend ÷ (Required rate of return - growth rate)

= $2 ÷ (12% - 4%)

= $25

As we can see that the share price present value would be $25 but the stock selling price is $40 so the present value would be lower than $40 that means the stock should not be purchased