You are interested in investing in the stock of ABC company. The stock is expect
ID: 2775426 • Letter: Y
Question
You are interested in investing in the stock of ABC company. The stock is expected to pay a yearly dividend of $1.60 per share next year, with dividends increasing 3% per year after that. The market rate of return on similar stock is 8%. What is the current value per share of the stock? What would the value be if the market rate of return went up to 11%?
if rate of return = 8%
curremy price = 1.60 /(.08 - .03 ))
= 1.60 / .05
= $ 32 per share
If Rate = 11 %
Price = 1.60 / (.11 -.03)
= 1.60 / .08
= 20 per share
5.Suppose the actual price of ABC stock from the previous question is $40 per share. Assuming that the market rate of return on similar stock is still 8%, would you want to buy it at this price? Why or why not? Calculate the stock’s actual rate of return as part of your answer.
6.In order to decide upon a corporate stock investment, most analysts would first perform a industry analysis. What is an industry and why is this step important? Make sure to discuss the potential problems with defining an appropriate industry for comparison as part of your answer.
Explanation / Answer
5.
No, i will not buy it at $ 40 per share.
As per the growth model as used in the previous case, the current fair price of the Stock is $ 32 per share assuming market rate of return is 8%.
Actual stock price is $ 40.
Based on the above,
Actual price is more than fair price, it meanse the asset is overpriced.
in this situtation it will not preferrable to buy such overpriced stock.
Stock will pay dividend of 1.6 per stock next year.
Current actual price= $ 40
Actual rate of return=(Actual dividend of next year/actual current price)+growth
=(1.6/40)+.03
= .07
= 7%
= 4%
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.