Question

11. Company B expects their stock to be trading at $145.00 a share by the end of next year. This year’s dividend was $12.50 and they expect it to grow by 10% a year. Assuming a discount rate of 12%:

      What should the current trading price be right now for Company B? _________________

                If the current trading price is $138.65 a share, would you purchase it? Why or why not?

Answer 1

ANSWER

NOTE Here the Current Year's Dividend Cannot be $ 12.5 as it is not possible. This Error can be concluded from the other Info given in Question such as Expected Price of $ 145.

The Current Year's Dividend Value has to be $ 2.50 in order to Solve this Question.

If you Need further Clarification on this do Ask in Comment.

Now Solving this Question taking Current Dividend {Do} as $ 2.50

Theoratical Current Stock Price = Do (1 + growth rate) / Ke - g

= $ 2.5 ( 1.10) / 0.12 - 0.10

= $ 2.75 / 0.02

$ 137.5

If Actual Trading Price is $ 138.65, We SHOULD NOT BUY because its Actual Worth is just $ 137.5 and it is currently Over-Valued in the Market.