QUESTION 0NE

You estimated a required rate of return on J.C. Penney (NYSE: JCP) stock as 8.8 percent using the CAPM. On examination, you believe stable growth at a rate of 6 percent is a good description of the long-term prospects of JCP. JCPs current dividend is K0.50. Required i. Calculate the Dividend Growth Model value for JCP stock. ( 3 Mark) ii. The current market price of JCP stock is K25. Using your answer to Question i, state whether JCP stock is fairly valued, undervalued, or overvalued. (1 Mark) iii. For the next five years, the annual dividends of a stock are expected to be K2.00, K2.10, K2.20, K3.50, and K3.75. In addition, the stock price is expected to be K40.00 in five years. If the cost of equity is 10 percent, what is the value of this stock? (6 Marks)