An investor holds a Google common stock, which is expected to pay a dividend of

Question

An investor holds a Google common stock, which is expected to pay a dividend of $5.00. The company has a corporation's expected growth rate (g) of 10% and the stock currently sells for $120. If an investor requires a rate of return of 15% then, as discussed in class, that investor should [V_c = D_0(l + g)/(r_c -g) = D_1/(l +g)/(r_c - g)] Work space:................................................................................................................ hold, that is neither buy nor sell buy more of the Google stock insufficient information given for a decision sell the Google stock

Explanation / Answer

As per divedend discount model price = D1/(r-g)

= 5*(1.1)/(15% - 10%) = 110$

But the stock is currently trading at 120 which is more than its actual worth so it may fall in value.

Answer d.sell the stock.

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