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Zoom Communication common stock is currently selling in the market for $ 258
Zoom Communication common stock is currently selling in the market for $ 258.73. Dividends of $0.09 per share were paid last year, return on equity is 6.29 %, and its retention rate is 130%.
a. What is the value of the stock to you, given a 15% required rate of return?
b. Should you purchase this stock?
Expert Solution
a). Computation of the value of the stock:-
Growth rate = Return on equity * Retention rate
= 6.29% * 130%
= 8.177%
Value of stock = D1 / (Required rate of return - Growth rate)
= $0.09 * (1 + 8.177%) / (15% - 8.177%)
= $0.097 / 6.823%
= $1.43
b). As the current price of stock is higher than the fair value of stock ($1.43). One should not purchase this stock.
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