Bensen Co.paid a dividend of $5.25 on its common stock yesterday.The company's dividends are expected to grow at a constant rate of 8.5% indefinitely.The required rate of return on this stock is 15.5%.You observe a market price of $78.50 for the stock.Should you purchase this stock?

Question

Quizplus · Accepted Answer

The intrinsic value of the stock is $77.78, which is calculated as follows:Intrinsic value = Dividend / (Required rate of return - Growth rate)= 5.25 / (0.155 - 0.085)= 77.78Since the market price of $78.50 is above the intrinsic value of $77.78, the stock is overvalued and should not be purchased.

Bensen CoPaid a Dividend of $5