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linen supply co paid a dividend of $3.25 on its common stock yesterday. the comp

ID: 2664376 • Letter: L

Question

linen supply co paid a dividend of $3.25 on its common stock yesterday. the companys dividends are expected to grow at a constant rate of 5.5% indefinitely. the required rate of return on this stock is 17.55. you observe a market price of $27.50 for the stock. should you purchase this stock?

a- yes, the market price is below the intinsic value of the stock
b- yes, but only if you can keep the stock for at least 5 years
c- no the growth rate in dividends is too far below the required return
d- no the market price is above the intrinsic value of the stock

Explanation / Answer

Answer:d- no the market price is above the intrinsic value of the stock D1=3.25/(1+5.5%)=3.428 3.428/(17.5%-5.5%)=28.566

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