Question

A stock offers an expected dividend of $3.50, has a required return of 14%, and has historically exhibited a growth rate of 6%. Its current price is $35.00 and shows no tendency to change. How can you explain this price based on the constant-growth dividend discount model

Answer 1

Answer:

the stock is undervalued

Explanation:

the constant-growth dividend discount model = dividend / required rate of return - growth rate

3.5 / 0.14 - 0.06 = $43.75

If the price of the stock is less than the one calculated, it means that the price is less than its intrinsic value. This means that the stock is undervalued. If otherwise, the stock is overvalued