Question
In: Accounting
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 1 year agoRelated Solutions
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?...
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$11.00
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LMN, Inc., 70
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$4.50
$68
$68
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IT IS NOT 7.33%, INCORRECTLY ANSWERED
Carnes Cosmetics Co.'s stock price is $57, and it recently paid a $2.00 dividend. This dividend...
Carnes Cosmetics Co.'s stock price is $57, and it recently paid
a $2.00 dividend. This dividend is expected to grow by 24% for the
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12%. At what constant rate is the stock expected to grow after Year
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