Question

Alyward​ & Bram common stock currently sells for $ 22.25 per share. The​ company's executives anticipate a constant growth rate of 11.9 percent and an​ end-of-year dividend of $1.25.

a. What is your expected rate of​ return?

b. If you require a return of 16 percent, should you purchase the​ stock?

If you require a return of 16 percent, you should buy or sell? the stock because the expected rate of return is Greater than or Less than? your required rate of return or the intrinsic value of the stock is Greater than or Less than? the current market price.

Answer 1

a

As per DDM

Price = Dividend in 1 year/(cost of equity - growth rate)

22.25 = 1.25/ (Cost of equity - 0.119)

Cost of equity% = 17.52 = expected return

b

Buy stock as expected return of the stock is higher than your required return