Assume that risk free rate is currently 6 percent. The expected return on the average stocks in the market is 12 percent. You are evaluating the…
BBS Fundamentals of Investment · 2080 · Solved Question with Answer
Assume that risk free rate is currently 6 percent. The expected return on the average stocks in the market is 12 percent. You are evaluating the prospect of ABC stock which is currently paying Rs 20 per share in dividend. The stock has a beta coefficient of 1.5. Currently, the aggressive marketing campaign launched by the company will enhance its earnings significantly. As a result the growth rate of dividends is expected to be 20 percent for the next two year. After this period, the growth rate is expected to slow down to a normal rate of 5 percent indefinitely.
a. Calculate the required rate of return on ABC stock.
b. What is the expected dividends per share on ABC stock for next two years?
c. At what price the stock is expected to sell at the end of year 2?
d. What is the intrinsic value of this stock today?
e. If the stock is currently trading in Rs. 260 per share, is the stock underpriced or overpriced? Would you prefer to buy the stock?