Question

1. A stock will pay a dividend of $1.79 at the end of this year. Their stable dividend growth rate is 3.1%. What do you expect the value of the stock to be at the end of year 7 if the investor's required return is 8.9%? State your answer as a dollar amount with two decimal places.

2.

An undervalued stock provides an expected return that is ____________ the required return calculated from the capital asset pricing model (CAPM).

less than

greater than

equal to

greater than or equal to

Answer 1

1. The value of the stock at the end of year 7 = present value of all future dividend from year 8 into perpetuity

D8 = 1.79*(1.031)^7 = 2.2164793421

The value of the stock at the end of year 7 = $38.22

2. An undervalued stock provides an expected return that is greater than the required return calculated from the capital asset pricing model (CAPM).

If the expected return < the required return, overvalued

If the expected return = the required return, fairly valued

Can you please upvote? Thank You :-)