A company just paid a dividend of $2.16. The dividend is expected to grow at a rate of 3.5%. If it is required rate of return on the stock is 8.0% and the stock is currently priced at $49.20, should they buy or sell?

12 years ago, your aunt and uncle decided to invest their entire tax refund from Uncle Till of $2,896 in an account that earns a 6.5 percent annual interest. Assuming annual compounding, how much do they have in the account today?

The value of the stock is computed as shown below:
= Dividend just paid x (1 + growth rate) / (required return  growth rate)
= ($ 2.16 x 1.035) / (0.08  0.035)
= $ 2.2356 / 0.045
= $ 49.68
Since the current price of the stock is less than the fair value of the stock. Hence the stock is undervalued by $ 0.48 as shown below:
= $ 49.68  $ 49.20
= $ 0.48
So, the correct answer is option of You should buy it: it is undervalued by $0.48.
The amount is computed as shown below:
Future value = Present value x (1 + r)^{n}
= $ 2,896 x 1.065^{12}
= $ 6,165.86 Approximately
Feel free to ask in case of any query relating to this question
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