One of your client’s is looking at an investment in the Acme Explosives Company

Question

One of your client’s is looking at an investment in the Acme Explosives Company which sells for $35 per share, and pays an annual dividend of $2.45. Dividends are expected to increase at 4% annually. The current risk free rate is 6.9% and the market is returning 14%. The beta of Acme is .72. The questions are as follows:

a) What should the investor’s required rate of return be in order to buy Acme?





b) What is the intrinsic value of Acme stock?





c) According to Myron Gordon’s Dividend Growth Model is Acme undervalued or
overvalued for this investor? And why?






d) What is the expected rate of return on Acme stock?

Explanation / Answer

22% 123352 under 23.7%

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