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Stewart Industries just paid a $1
Stewart Industries just paid a $1.50 per share dividend on its common stock yesterday. The dividend is expected to grow 10 percent a year for the next five years, after which time the dividend is expected to grow at a constant rate of 5 percent a year forever. The required rate of return on the stock is 14%
1) What is the price of the stock at the end of year 5
2) What should be the stock price today
3) If the stock is selling for $27.82 per share, should you buy or not buy it, why ?
Expert Solution
1) Price of the stock at the end of year 5 = $28.18
2) Stock price today = $21.38
3) As the stock is currently selling for $27.82 per share is higher than the fair value ($21.38). So, the stock is overvalued and should not be bought.
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