Question

Lollipop, 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 $37.35. 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. Yes, it is a good buy because the stock is worth 37.35
c. No, it is not a good buy because the stock is worth $9.50
d. None of the above

Answer 1

a . No, it is not a good buy because the stock is worth $30.56

Step-by-step explanation:

Calculation for how much is the stock worth and is it a good buy

Using this formula

Stock worth=D1/(Required return-Growth rate)

Let plug in the formula

Stock worth=2.75/(0.18-0.09)

Stock worth=2.75/0.09

Stock worth=$30.55

Stock worth=$30.56(Approximately)

Based on the above calculation we can see that the current price of the stock of the amount of $37.35 is higher than the current worth amount of the stock of the amount of $30.56 which indicates that " No, it is not a good buy because the stock is worth $30.56"