Kilsheimer Company just paid a dividend of $5 per share. Dividends are expected to grow at a constant rate of 7% per year.

Kilsheimer Company just paid a dividend of $5 per share. Dividends are expected to grow at a constant rate of 7% per year. What is the value of the stock to you if the required return is 16%? If the stock is trading for $45 in the market, would you want to buy this stock?

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Expert Solution

here Diivdend just paid D0 = $5

growth rate g = 7%

rate of return k = 16%

As per dividend discount model

Share Price = D0*(1+g)/(k-g)

= 5*(1+7%)/(16%-7%)

= 5.35/0.09

= $59.44

Since stock is trading at $45 hence it is undervalued as of now. You should buy the stock.

jeff jeffy answered 1 year ago

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