KDP's most recent dividend was $2.00 per share and is selling today in the market for $70. The dividend is expected to grow at a rate of 7% per year for the foreseeable future. If the market return is 10% on investments with comparable risk, should you purchase the stock?
A) No, because the stock is overpriced $1.33.
B) No, because the stock is overpriced $3.33.
C) Yes, because the stock is underpriced $1.33.
D) Yes, because the stock is underpriced $3.33.

Question

Quizplus · Accepted Answer

The correct answer is C because the stock is underpriced $1.33. The dividend yield is 2.00/70 = 2.86%. The expected return is 2.86% + 7% = 9.86%. Since the market return is 10%, the stock is underpriced.

KDP's Most Recent Dividend Was $2