A stock recently paid a dividend of $3 per share. Its growth rate is expected to be 8%. Investors require a 10% return. The stock is selling in the market for $140. What is this stock worth and is the stock undervalued or overvalued?

Question

Quizplus · Accepted Answer

To find the intrinsic value of the stock using the dividend discount model:
PV = D / (r - g)
PV = 3 / (0.1 - 0.08) = 150
Therefore, the intrinsic value of the stock is $150, which is less than the current market price of $140, making the stock undervalued. However, we also need to consider the growth rate. Since the growth rate is positive, we can assume that the stock price will increase in the future leading to the intrinsic value of $162. Therefore, choice A is the best answer.

A Stock Recently Paid a Dividend of $3 Per Share