Zoom Communication common stock is currently selling in the market for $ 258

Finance Aug 09, 2020

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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