Question

You are currently thinking about investing in a stock valued at $25.00 per share. The stock recently paid a dividend of $2.25 and its dividend is expected to grow at a rate of 5 percent for the foreseeable future. You normally require a return of 14 percent on stocks of similar risk.

Is the stock overpriced, underpriced, or correctly priced?

Answer 1

$26.25, underpriced

Step-by-step explanation:

2.25 x ( 1 + 5% ) ÷ ( 14% - 5% ) = 26.25

25 is lower than 26.25 therefore under priced.