Question

Tyson Inc. is currently trading at $18 per share. The company is expected to pay a dividend of $1.63/per share next year. The dividend is expected to growth 2.5% per year into perpetuity, and the cost of equity is currently 10.5%. Using Gordon growth what is the present value of Tyson Inc, and given you answer should you buy or sell the stock

Answer 1

$20.38 buy

Step-by-step explanation:

The computation of present value is shown below:-

Fair Value according to Gordon Model = Expected Div ÷ (Required Return - Growth rate)

= $1.63 ÷ (10.5% - 2.5%)

= $1.63 ÷ 8%

= $20.38

Fair Price = $ 20.38 and Actual Price = $18.00

As Fair Price is greater than the Actual Price so, the stock is under priced. Therefore advice to buy.