Your sister-in-law, a stockbroker at Invest Inc., is trying to sell you a stock with a current market price of $26. The stock's last dividend (Do) was $2.00, and earnings and dividends are expected to increase at a constant growth rate of 10 percent. Your required return on this stock is 20 percent. From a strict valuation standpoint, you should: a. Buy the stock; it is fairly valued. b. Buy the stock; it is undervalued by $3.00. c. Buy the stock; it is undervalued by $2.00. d. Not buy the stock; it is overvalued by $4.00. e. Not buy the stock; it is overvalued by $3.00.
Your sister-in-law, a stockbroker at Invest Inc., is trying to sell you a stock with a current market price of $26. The stock's last dividend (Do) was $2.00, and earnings and dividends are expected to increase at a constant growth rate of 10 percent. Your required return on this stock is 20 percent. From a strict valuation standpoint, you should: a. Buy the stock; it is fairly valued. b. Buy the stock; it is undervalued by $3.00. c. Buy the stock; it is undervalued by $2.00. d. Not buy the stock; it is overvalued by $4.00. e. Not buy the stock; it is overvalued by $3.00.
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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Transcribed Image Text:Your sister-in-law, a stockbroker at Invest Inc., is trying to sell you a stock with a
current market price of $26. The stock's last dividend (Do) was $2.00, and earnings
and dividends are expected to increase at a constant growth rate of 10 percent. Your
required return on this stock is 20 percent. From a strict valuation standpoint, you
should:
a. Buy the stock; it is fairly valued.
b. Buy the stock; it is undervalued by $3.00.
c. Buy the stock; it is undervalued by $2.00.
d. Not buy the stock; it is overvalued by $4.00.
e. Not buy the stock; it is overvalued by $3.00.
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