The common stock of NCP paid $1 35 in dividends last year

Finance Dec 14, 2020

The common stock of NCP paid $1 35 in dividends last year. Dividends are expected to grow at an annual rate of 7.50 percent for an indefinite number of years.
a) If your required rate of return is 9.80 percent, what is the value of the stock for you?
b) Should you make the investment?

Expert Solution

a.)

Price of stock= D1/ (Ke- g)

= D0* (1+ g)/ (Ke- g)

= 1.35* (1+ 7.50%)/ (9.80%- 7.50%)

= 1.35* 1.075/ 0.023

= $ 63.10

b.)

Current price is required. We should make the? investment if the current price is lower than the value of the stock

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