A security analyst has been studying a particular corporations stock in order to decide whether to issue a buy or sell order to his clients. The analyst has been able to (1) estimate that next periods dividend will be $5, (2) the corporation pays-out a constant 50% of its earnings in dividends, (3) the earnings and dividends should grow at a 5% rate, and (4) 15% would be a proper discount rate for this stock. The security analyst plans to use this information to apply the Gordon model (Dividend Discount Model) to determine the proper price of the stock.

a. If the current market price of the stock is $55, should the analyst advise clients to buy or sell this stock.

b. At the current market price of $55, what is the rate of return on the stock?

c. According to the Gordon model, what should the price-earnings ratio be for this stock?