1. Use the following three methods to determine if you will purchase this stock

Question

1. Use the following three methods to determine if you will purchase this stock at current market price. Assume market interest rate ( r) as 12%, constant dividend growth rate (g) as 10%, EPS will increase 10% next year, and industry average P/E ratio as 20 times

(1) True value method (Gordon dividend valuation model )

(2) Annual rate of return method (Gordon dividend valuation model)

(3) P/E multiples approach

2) If you purchased this stock at 52 week range low, sold it at current market price, and you also received dividend during this holding period; calculate holding period rate of return.

Can Anybody Help me Thanks!

Explanation / Answer

1.1 stock price = 2.08*(1+10%)/12%-10%=$114.4 (Will not buy as it is overpriced)

1.2. Annual rate of return =g +current annual dividends(1+g)/Current price

=10%+2.08*(1+10%)/118.03

=11.94% (Less than market interest rates so wil not buy)

1.3 PE ratio of a stock is less than industry PE so there are chances of improvement in the stock price so will buy.

2 Holding period return = (sell price+dividend- buy price)/buy price *100

                                 =(118.03+2.08)-92/92*100

= 30.55%

Related Questions

Navigate

• Browse (All)
• Browse 1
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.