H.J.Corp.'s common stock paid $2.50 in dividends last year (D₀).Dividends are expected to grow at a 12-percent annual rate forever.If H.J.'s current market price is $40.00,and your required rate of return is 23 percent,should you purchase the stock?

Question

Quizplus · Accepted Answer

To determine if a stock is a good investment, we need to calculate its intrinsic value based on the dividend growth rate and the required rate of return. The formula to calculate the intrinsic value of a stock is V₀ = (D₁ / (r - g)), where V₀ is the intrinsic value, D₁ is the next dividend payment, r is the required rate of return, and g is the dividend growth rate. Using this formula, we can calculate the intrinsic value of H.J. Corp's stock as follows:

V₀ = (2.5 * (1 + 0.12)) / (0.23 - 0.12) = $38.28

Comparing the intrinsic value of the stock ($38.28) to its current market price ($40.00), we see that the stock is overpriced. Therefore, the answer is C: No, the stock is overpriced, and we should not purchase it.

HJCorp'S Common Stock Paid $2