Your brother-in-law, a stockbroker at Invest, Inc., is trying to sell you a stoc

Question

Your brother-in-law, a stockbroker at Invest, Inc., is trying to sell you a stock with a current market price of $25. The stock's next dividend (D1) is expected to be $2.00, and earnings and dividends are expected to increase at a constant growth rate of 8 percent. Your required return on this stock is 17.091 percent. From a strict valuation standpoint, yobuy the stock;

it is fairly valued not buy the stock;

it is overpriced by $5.00 buy the stock;

it is underpriced by $5.00 not buy the stock;

it is overpriced by $3.00 buy the stock;

it is underpriced by $2.00 u should:

(please show work)

Explanation / Answer

Dividend $2 growth rate 8% Return on investment 17.09% By using gorden dividend growth model Stock Price = 2/(0.17091-0.08) Stock Price         22.00 Current Price of stock 25 Overpriced         (3.00) Hence, it is overpriced by $3 buy the stock

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