One of your colleagues has recommended that you buy 10 shares in a certain company, say, ABC Ltd. He tells you that the company has a good track record of paying regular dividend every year and the dividends are likely to grow at a rate of 4% per year on an average for the foreseeable future. The next dividend is expected to be $1.50 per share and the shares are selling in the secondary market for $28.50 per share. As per your financial plans and life profile, you feel that any risky investment like in shares of a company, should earn at least 9% per annum. Compute the intrinsic value of the share (Intrinsic value of any financial instrument is the value that it should sell for in the market). Will you buy these shares? Discuss and show why? What might cause a difference between a share’s intrinsic value and its market price?
One of your colleagues has recommended that you buy 10 shares in a certain company, say, ABC Ltd. He tells you that the company has a good track record of paying regular dividend every year and the dividends are likely to grow at a rate of 4% per year on an average for the foreseeable future. The next dividend is expected to be $1.50 per share and the shares are selling in the secondary market for $28.50 per share. As per your financial plans and life profile, you feel that any risky investment like in shares of a company, should earn at least 9% per annum. Compute the intrinsic value of the share (Intrinsic value of any financial instrument is the value that it should sell for in the market). Will you buy these shares? Discuss and show why? What might cause a difference between a share’s intrinsic value and its market price?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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One of your colleagues has recommended that you buy 10 shares in a certain company, say, ABC Ltd. He tells you that the company has a good track record of paying regular dividend every year and the dividends are likely to grow at a rate of 4% per year on an average for the foreseeable future. The next dividend is expected to be $1.50 per share and the shares are selling in the secondary market for $28.50 per share.
As per your financial plans and life profile, you feel that any risky investment like in shares of a company, should earn at least 9% per annum.
- Compute the intrinsic value of the share (Intrinsic value of any financial instrument is the value that it should sell for in the market).
- Will you buy these shares? Discuss and show why?
- What might cause a difference between a share’s intrinsic value and its market price?
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