Go to any Finance website, and get the quote information of a stock you chose: E

Question

Go to any Finance website, and get the quote information of a stock you chose:

Explain all information on the stock quote web page

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

True value method (Gordon dividend valuation model )

Annual rate of return method (Gordon dividend valuation model)

P/E multiples approach

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.

Explanation / Answer

Accorging to Gordon dividend valuation model Po = D1/Ke-g

here Po = Today's price, g = growth rate, Ke= cost of capital

Let us find Po using given information

Po= D0(1+g)/Ke-g

=2.52(1+0.1)/12%-10%

=2.772/2%

=138.6$

Current market price is 174.96$ . Hence it is overvalued one should not buy this stock

Now using same formula we will find Ke

Ke = D1/Po + g

=2.772/174.96 + 0.1

=0.0158 + 0.1

=11.584%

here market interest rate is more than return provided by company thus one should not buy the stock

P/E multiples approach

Stock is currently trading at P/E of 19.86. Industry average is 20 thus it is showing that there is no potential growth compared to industry. Should not buy

If one bought this stock at 52 week low i.e. at 108.25 then ,

holding period rate of return = Capital appreciation + dividend/ Purchase price

(174.96-108.25) + 2.52 / 108.25

=69.23/108.25

=63.95%

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