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 share?

Question

Quizplus · Accepted Answer

To determine if the share is overpriced or underpriced, we can use the dividend discount model (DDM).

DDM = Dividend / (Market Return - Dividend Growth Rate)

Plugging in the given values, we get:

DDM = 2 / (0.10 - 0.07) = $66.67

Since the share is currently selling for $70, it is undervalued by $3.33. Therefore, the best choice is C: Yes, because the share is underpriced $1.33.

KDP's Most Recent Dividend Was $2