Question

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?

Answer #1

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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