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

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