Company B expects their stock to be trading at $165.00 a share by the end of...

Company B expects their stock to be trading at $165.00 a share by the end of next year. This year’s dividend was $10.00 and they expect it to grow by 8% a year. Assuming a discount rate of 12%: What should the current trading price be right now for Company B? _________________ If it is currently trading for $138.65, would you purchase it? _____________________

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Expert Solution

Next year’s dividend = 10 * (1 + 0.08)

= 10 * 1.08

= 10.8

To calculate PV of stock we need to discount the FV of stock and dividend

Current value of stock = (10.8 + 165)/(1 + 0.12)¹

= 175.8/ 1.12

= 156.96

If it is currently trading at $138.65, then it is advisable to buy this stock because it is undervalued, and price of the stock will increase in near future.

jeff jeffy answered 2 years ago

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