Question

Hannah Corporation has just paid \$0.20 dividend per share. The market return is 5%. The dividend...

Hannah Corporation has just paid \$0.20 dividend per share. The market return is 5%. The dividend is expected to grow by 2% every year. What is the current market value of the stock? What will the stock be worth in four years? If the stock is selling at \$5, is it worth buying? Why?

Hannah corporation has just paid dividend to 0.2(d0) means it is d0 growth(g) is 2%

Market return (ke)=5%

D1= d0*g

= 0.2*1.02

= 0.204

Current value(p0)

P0 = D1/ke -g

=.204/0.05-0.02

Current market value = 6.8\$

Value of stock in four years

P4= D5/ke-g

= .2208/0.05 - 0.02

= 7.3605 \$

Currently, stock is selling at \$ 5 then yes it is worth buying. Because hypothetical price of stock is 6.8\$ but now it is selling at \$5 so stock is undervalued by 1.8\$

We are getting share of worth 6.8 \$ for 5\$ only

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