Question #100
Reading: Reading 20 Discounted Dividend Valuation
PDF File: Reading 20 Discounted Dividend Valuation.pdf
Page: 39
Status: Unattempted
Question
The current market price per share for High-on-the-Hog, Inc. is $52.50, and an analyst is using the Gordon Growth model to determine whether this is a fair price. The company paid a dividend of $3.00 last year on earnings of $4.50 a share. If the required rate of return is 11.00% and the expected grown rate in earnings and in dividends is 5%, 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 $52.50 = [$3.00(1.05) / 0.11 − 0.05)].