You believe that the required return on Big Hat stock is 12% and that the expected dividend growth rate is 10%, which is expected to remain constant for the foreseeable future. Is the stock currently
Overvalued, undervalued, or fairly priced?

Question

Quizplus · Accepted Answer

The stock's current price is determined by the formula P0 = D1 / (r - g), where P0 is the current price, D1 is the expected dividend for the next period, r is the required return, and g is the expected dividend growth rate. Since the required return is higher than the expected dividend growth rate (r > g), the stock is overvalued.

You Believe That the Required Return on Big Hat Stock