Question

Find a publicly traded stock which has a dividend payable to shareholders. Assuming zero growth in the dividend and you require a 8% return, calculate the stock's intrinsic price value. Compare the intrinsic value with the stock's current price. If the intrinsic price is below the current price, is this a stock that is a good value for investment? If the intrinsic price is above the current price, is this stock overvalued? Use the internet to find sources of information that will help you make a decision regarding the investment merits of this stock. You must provide research-based information to support your rationale for investing or not investing in this company's stock. Your response should not be entirely opinion based. Your conclusions regarding the investment merit of this stock must flow from the research information you collected.

Answer #1

Let's select Cisco. It paid a dividend = 1.32 per share this year

Intrinsic Stock Price = D / r = 1.32 / 8% = $16.50

Its current stock price is around $41. As the intrinsic value is below the current stock price, the stock is overvalued and not a good value for investment.

It started paying dividneds in 2012, when it paid $0.24 per share. This year it will pay 1.32 per share, which means annual growth rate = (1.32 / 0.24)^(1/6) = 33%. In this case, we assume that the stock is not growing its dividends and hence, its intrinsic value is low. If we assume that it will grow its dividend by 5%, then

intrinsic value = 1.32 / (8% - 5%) = $44

It means that the stock is slightly undervalued at $41. Hence, it does merit an investment now.

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