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The market price of Trusty Inc. stock is $60, and the company recently paid a $2.5...

The market price of Trusty Inc. stock is $60, and the company recently paid a $2.5 cash dividend. It is expected that the dividend will grow at the rate of 20 percent for the next 3 years, and then grow forever at a constant rate of 5%, while the required rate of return on this kind of stock is 12%• Calculate the expected price of the stock based on non-constant dividend discount model • Is the stock under or overpriced? Should we buy or sell the stock if we decide only based on the available information?

Solutions

Expert Solution

2. As the current market price of the stock is $.60 which is lower than the expected stock price i.e., $.73.45. The stock is undervalued or underpriced.

3. Based on the information available the stock is undervalued and therefore is advisable to buy the stock. Because it's expected present value of cash flows is higher than its current market price.

ekkarill92 answered 2 years ago
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