Rhea Kirby owns shares in Ryoko Corp. Currently, the market price of the stock is $36.34. Management expects dividends to grow at a constant rate of 6 percent for the foreseeable future. Its last dividend was $3.25. Rheas required rate of return for such stocks is 16 percent. She wants to find out whether she should sell her shares or add to her holdings.

4. What is the value of this stock?

56.91

12.18

34.45

22.76

5. Based on your answer to question 4, should Rhea buy additional shares in Ryoko Corp? Why or why not?

Yes, she should buy more shares. This stock is underpriced with the stock selling at a lower price than what it is worth.

No, she should not buy more shares. This stock is overpriced with the stock selling at a higher price than what it is worth.

No, she should not buy more shares. The risk is higher than market beta.

The answer depends on how interest rate changes.