Question
In: Finance
The common stock of NCP paid $1.35 in dividends last year. Dividends are expected to grow...
The common stock of NCP paid $1.35 in dividends last year. Dividends are expected to grow at an annual rate of 7.90 percent for an indefinite number of years.
a. If NCP's current market price is $22.93 per share, what is the stock's expected rate of return?
b. If your required rate of return is 9.9 percent, what is the value of the stock for you?
c. Should you make the investment?
Solutions
Expert Solution
Stock Price = Expected Dividend/(Expected Return – growth rate)
22.93 = 1.35*(1+7.90%)/(Expected Return – 7.90%)
Expected Return = 14.25%
b.Value of stock = 1.35*(1.0790)/(9.9%-7.9%)
= $72.8325
i.e. $72.83
c. Yes, as price is lower than value
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