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Firm A distrubuted dividends to its shareholders for the current year according to the payout ratio...

Firm A distrubuted dividends to its shareholders for the current year according to the payout ratio of 25%. Net profit was 80 million TL. Total shares are 10 million. The dividends are expected to grow at a constant rate of% 12 in the following years. Find the fundamental price per share according to Gordon Model if the Turkey 10 year benchmark government bond in TL yields at% 14 and the risk premium is% 6. If one share of firm A is selling at 32 TL in Borsa Istanbul, would you invest in this stock? Is it undervalued or overpriced?

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Answer #1
Net Profit       80.00
Payout ratio 25%
Dividend paid       20.00
No of shares            10
Dividend per share         2.00
Risk free rate 14%
Risk premium 6%
Required return 20%
Current Dividend         2.00
Rate of return 20.00%
Growth Rate 12.00%
Fair share price= =Current Dividend*(1+Growth rate)/(Rate of return-Growth Rate)
Fair share price= =2*(1+0.12)/(0.2-0.12)
Fair share price=       28.00
Since market price is 32 which is higher than the fair price, we can say that the stock is overprice and we should not invest.
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