Question

In: Finance

If, using the one-period model, you calculate a fair price (present value) of a stock to...

If, using the one-period model, you calculate a fair price (present value) of a stock to be $25/share, but the same stock is currently trading at $29.00/share on Nasdaq what should you do

Buy the stock as the present value of the stock is lower than the current stock price

Sell the stock as the present value is higher than the current stock price

Sell the stock as the present value is lower than the current stock price

Buy the stock as the present value of the stock is higher than the current stock price

Solutions

Expert Solution

If, using the one-period model, you calculate a fair price (present value) of a stock to be $25/share, but the same stock is currently trading at $29.00/share on Nasdaq what should you do?

Answer: Sell the stock as the present value is lower than the current stock price

Explanation

Now we will check each options provided in the question

Data provided in the question

Current stock price = $29

Present Value = $25

1. Buy the stock as the present value of the stock is lower than the current stock price.

Buying recommendation for the stock is given when share current price is lower than the present value, so this buying is not recommended.

2. Sell the stock as the present value is higher than the current stock price.

This statement is wrong; in the given question present value is lower than the current price of the share.

3. Sell the stock as the present value is lower than the current stock price

Selling recommendation for the share is given when shares current price is higher than the present value of the share, so this is the correct answer.

4. Buy the stock as the present value of the stock is higher than the current stock price

This statement is wrong; in the given question present value is lower than the current price of the share.

jeff jeffy answered 2 years ago
Next > < Previous

Related Solutions

The Discounted Dividend Model assumes that the price of a stock is the present value of...
The Discounted Dividend Model assumes that the price of a stock is the present value of what? (5 points)
You construct a one-period binomial tree to model the price movements of a stock. You are...
You construct a one-period binomial tree to model the price movements of a stock. You are given: The length of one period is 6 months. The current price of the stock is 100. The stock pays dividends continuously at a rate proportional to its price. The dividend yield is 3%. Suppose: u denotes one plus the rate of gain on the stock if the stock price goes up. d denotes one plus the rate of loss on the stock if...
The current spot price for a stock is $100, using a binomial model, in every period...
The current spot price for a stock is $100, using a binomial model, in every period it has been determined that the probability for this stock to go up is 70%, in this case the stock will increase in value a 12 %. If the stock goes down, the value will decrease 13%. For a call option with strike price of $186  and after 12 periods:             1) Calculate the values of the factor "u" and "d".             2) Show a diagram with...
For a three-period binomial model for modeling the price of a stock, you are given: The...
For a three-period binomial model for modeling the price of a stock, you are given: The current price of the stock is 125. The length of each period is one year. u = 1.2, where u is one plus the rate of capital gain on the stock if the price goes up. d = 0.8, where d is one plus the rate of capital loss on the stock if the price goes down. The continuously compounded risk-free interest rate is...
How might the Discounted Dividend Model present challenges when attempting to calculate the stock price for...
How might the Discounted Dividend Model present challenges when attempting to calculate the stock price for rapidly growing technology companies? (5 points)
Net present value Using a cost of capital of 11​%, calculate the net present value for...
Net present value Using a cost of capital of 11​%, calculate the net present value for the project shown in the following table and indicate whether it is​ acceptable, Initial investment ​(CF 0CF0​) negative 1 comma 143 comma 000−1,143,000 Year ​(t​) Cash inflows ​(CF Subscript tCFt​) 1 $81,000 2 $138,000 3 $193,000 4 $258,000 5 $311,000 6 $377,000 7 $270,000 8 $98,000 9 $45,000 10 $29,000 The net present value​ (NPV) of the project is _____​$ ​(Round to the nearest​...
Calculate the present value of a stock if this stock is expectedto pay $1.75 dividend...
Calculate the present value of a stock if this stock is expected to pay $1.75 dividend in the next six years and then in year 7 and thereafter it pays $2 constant dividend forever. The interest rate is 8%. Please provide excel formula and step-by-step explanations on your calculation to get your final answer.
Calculate the present value of a stock if this stock is expected to pay $2.5 annual...
Calculate the present value of a stock if this stock is expected to pay $2.5 annual dividend in next 3 years, and it is expected to pay $3.5 annual dividend for year 4 to year 6. In year 7 and thereafter it pays $5 constant dividend forever. The interest rate is 8%. Please provide excel formula and explain your step-by-step calculation in your answer.
Calculate the present value of a stock if this stock is expected to pay $10.60 dividend...
Calculate the present value of a stock if this stock is expected to pay $10.60 dividend in the next three years and then $15 for year 4 to year 6, and in year 7 and thereafter it pays $20 constant dividend forever. Assume investors opportunity cost of investment is 10%. provide excel formula in your answer and briefly explain the steps in your calculations
Calculate the present value of a stock if this stock is expected to pay $2.5 annual...
Calculate the present value of a stock if this stock is expected to pay $2.5 annual dividend in the next 3 years, and it is expected to pay $3.5 annual dividend for year 4 to year 6. In year 7 and thereafter it pays $5 constant dividend forever. The interest rate is 8%. Please provide excel formula and explain your step-by-step calculation in your answer.
ADVERTISEMENT
Subjects
ADVERTISEMENT
Latest Questions
ADVERTISEMENT