Question
Buick and Reilly is a major Wall Street investment management firm. It considers a stock fairly valued if in the firms estimate the fair value
Buick and Reilly is a major Wall Street investment management firm. It considers a stock fairly valued if in the firms estimate the fair value is within 5% of market price. If not, then it considers the stock Over or Under valued depending on the intrinsic (fair) value estimate. The firm has developed the following dividend forecast for Super Natural Computers:
End of Year |
Dividend ($) |
1 |
2.00 |
2 |
2.64 |
3 |
2.56 |
They are also of the opinion that the stock will continue to sell at a price that justifies its usual PE ratio of 16. At the end of 3 years, the company is expected to earn $6.00 on a per share basis. If the appropriate discount rate is 9.60%, should the firm classify the stock as Over, Under or Fair if it is currently selling for $78.87? Show all your work.
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