On a certain date the following represents the stock price for Universal Busines

Question

On a certain date the following represents the stock price for Universal Business Machines (UBM).

52 Week High $54.05, 52 Week Low $41.73, Dividends paid $0.80, yesterday’s closing price $47.25

According to the Value Line Investment, the growth rate in dividends for UBM Corporation is expected to be 18%/year for the next 6 years.Assume that UBM meets this anticipated abnormal dividend growth rate as expected, and then the growth rate falls to 4% per year forever.Assume investors require 14% return on the stock.

Is the stock priced correctly?

Explanation / Answer

Stock Price = $15.64

Stock Price has not been priced correctly

Year Cash Flow PVF (14%) PV of Cash Flow 1 0.944 (0.80 * 1.18) 0.877 0.827888 2 1.11392 (0.944 * 1.18) 0.769 0.856604 3 1.3144256 (1.11392 * 1.18) 0.675 0.887237 4 1.5510222 (1.3144256 * 1.18) 0.592 0.918205 5 1.8302062 (1.5510222 * 1.18) 0.519 0.949877 6 2.1596433 (1.8302062 * 1.18) 0.455 0.9826377 6 22.46 (2.1596433 (1.04) / (0.14 - 0.04)) 0.455 10.2193 15.6417487

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