Problem 7-22 Stock Valuation [LO 1]

Youve collected the following information from your favorite financial website.

52-Week Price

Stock (Div)

Div Yld %

PE Ratio

Close Price

Net Chg

Hi

Lo

77.40

10.43

Palm Coal 0.36

2.6

6

13.90

0.24

55.81

33.42

Lake Lead Grp 1.54

3.8

10

40.43

0.01

130.94

69.55

SIR 2.05

2.3

10

88.98

3.07

50.24

13.95

DR Dime 0.80

5.2

6

15.43

0.26

35.00

20.74

Candy Galore 0.32

1.5

28

??

0.18

According to your research, the growth rate in dividends for SIR for the next five years is expected to be 20 percent. Suppose SIR meets this growth rate in dividends for the next five years and then the dividend growth rate falls to 5.25 percent indefinitely. Assume investors require a return of 12 percent on SIR stock.

Requirement 1:

According to the dividend growth model, what should the stock price be today? (Do not round intermediate calculations. Round your answer to 2 decimal places (e.g., 32.16).)

Current stock price

$

Requirement 2:

Based on these assumptions, is the stock currently overvalued, undervalued, or correctly valued?