Question #3
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 1
Status: Incorrect
Correct Answer: B
Your Answer: A
Question
The current market price per share for Burton, Inc. is $33.33, and an analyst is using the Gordon Growth model to determine whether this is a fair price. The company paid a dividend of $2.00 last year on earnings of $2.50 a share. If the required rate of return is 12.00% and the expected grown rate in earnings and in dividends is 6%, the current market price is most likely:
Answer Choices:
A. correctly valued
B. undervalued
C. overvalued
Explanation
The value per share using the estimates is $35.33 = [$2.00(1.06) / 0.12 − 0.06)]. This is
higher than the current share price.