Question

Moon Inc. paid a dividend of $3 this year. The dividends you expect to grow at...

Moon Inc. paid a dividend of $3 this year. The dividends you expect to grow at 3% a year forever. The risk free rate is 3% and you require a risk premium of 5%. What is the value of the stock based on the dividend discount model? (10 points)? If the price of the stock in the market is $60 a share, should you buy it and why?

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Given about Moon Inc.'s stock,

Dividend paid D0 = $3

dividend growth rate g = 3%

risk free rate = 3%

required risk premium on stock = 5%

So, required return on stock rs = risk free rate + risk premium = 3 + 5 = 8%

Value of the stock today using constant dividend growth model is

P0 = D0*(1+g)/(rs - g) = 3*1.03/(0.08 - 0.03) = $61.80

So, intrinsic value of stock today is $61.80

actual price of stock today = $60

Since stock is underpriced, i.e. current price of the stock is less than expected price, stock price is expected to increase in near future. So, stock should be purchased.

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
IBM just paid a dividend of $1.2 per share. You expect IBM's dividend to grow at...
IBM just paid a dividend of $1.2 per share. You expect IBM's dividend to grow at a rate of 10% per year for the next three years, and then you expect constant dividend growth of 5% forever. Based on the risk of IBM stock, you require a return of 8%. Using the dividend discount model, what is the value of IBM stock?
Temple Lunch​ Trucks, Inc. just paid a dividend of​ $2.00. Dividends are expected to grow at...
Temple Lunch​ Trucks, Inc. just paid a dividend of​ $2.00. Dividends are expected to grow at a rate of​ 3% per year from here on out. If the​ risk-free rate is​ 2%, the MRP is​ 8%, and Temple Lunch​ Trucks’ stock is only​ 40% as risky as the​ market, what is the most that you should be willing to pay for a share of this stock​ today?
Widget Manufacturers Inc. just paid a $3 per share dividend. It is expected that dividends will...
Widget Manufacturers Inc. just paid a $3 per share dividend. It is expected that dividends will grow at 10.00% per year for the next 2 years, at 6.00% the third year and 3.00% every year thereafter. Widget’s’ equity beta is 0.90, while the risk-free rate is 3.20% per year and the market risk premium is 6.00% per year. Based on this information, compute the price per share of Widget stock. Round your answer to the nearest penny. For example, $2,371.243...
Purple Inc. recently paid a common stock dividend of $3.00 (D0 = $3.00). They expect their...
Purple Inc. recently paid a common stock dividend of $3.00 (D0 = $3.00). They expect their dividends to grow by 9% per year for 2 years. In year 3, they expect their dividends to start growing at a constant 4% per year forever. You require a 12% return on this stock. What is the most you would be willing to pay for this stock?
Runtan Inc. has just paid an annual dividend of $0.45 per share. Analysts expect the firm's...
Runtan Inc. has just paid an annual dividend of $0.45 per share. Analysts expect the firm's dividends to grow by 5% forever. Its stock price is $34.9 and its beta is 1.7. The risk-free rate is 2% and the expected return on the market portfolio is 8%. What is the best guess for the cost of equity?
Runtan Inc. has just paid an annual dividend of $0.45 per share. Analysts expect the firm's...
Runtan Inc. has just paid an annual dividend of $0.45 per share. Analysts expect the firm's dividends to grow by 3% forever. Its stock price is $37.9 and its beta is 1.1. The risk-free rate is 2% and the expected return on the market portfolio is 8%. Attempt 1/1 for 10 pts. Part 1 What is the best guess for the cost of equity?
Maroon Inc. just paid a $1.57 dividend and investors expect that dividend to grow by 5%...
Maroon Inc. just paid a $1.57 dividend and investors expect that dividend to grow by 5% each year forever. If the required return on the stock investments is 14%, what should be the price of the stock in 4 years?
Based on the historical performance of Strava Corporation, you expect earnings and dividends to grow at...
Based on the historical performance of Strava Corporation, you expect earnings and dividends to grow at a constant rate of 9%. You are considering buying this stock at its current market price of $60. Based on a beta of 1.2, you would require a return of 14% on this stock. The stock just paid a dividend of $4 based on recent accounting statements. How much should you pay for this stock?
NBL paid a dividend current year of $3.00 per share. Dividends are expected to grow at...
NBL paid a dividend current year of $3.00 per share. Dividends are expected to grow at a rate of 5 percent per year from now on. Given the risk of the Bank, the correct discount rate for this bank is 14 percent. What should the value of Bank’s stock be in the market?
A firm has just paid a dividend of 11, dividends are expected to grow at 3%...
A firm has just paid a dividend of 11, dividends are expected to grow at 3% in the future. If the firm has a beta of 0.8 and the market risk premium and risk free rate are 10.7% and 3.2% respectively, then what is the intrinsic value of this firm today?
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT