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Homework answers / question archive / A stock offers an expected dividend this year of $3
A stock offers an expected dividend this year of $3.50, has a required return of 14%, and has historically exhibited a growth rate of 6%. Its current price is $35.00, should the investor purchase this stock? Why?
According to Dividend discount model:
Intrinsic Value of Share = Expected Dividend / (Required Return - Growth Rate)
= $3.50 / (14% - 6%)
= $3.50 / 8%
= $43.75
As the Stock Intrinsic value i.e $ 43.75 is greater than stock current price i.e $ 35 which means stock is under-priced in the market thus, It is recommended to buy the stock at current price.
