Question
Suppose that the stock of company X is currently quoted on the stock exchange as follows: bid price 50, ask price 51 per share. Suppose
Suppose that the stock of company X is currently quoted on the stock exchange as follows: bid price 50, ask price 51 per share. Suppose that there are no commission fees on transactions. This company is expected to pay a dividend of 3.50 per share exactly in a year and a dividend of 6 per share exactly in two years from now. The annual risk-free rate of return is 4%, the equity market risk premium is 10% and the beta of the stock is 1.2. Suppose that you expect the bid price of this companys stock to be 65 and the ask price of this companys stock to be 66 exactly in two years from now. Using the Dividend Discount Model, estimate the present value of this companys stock and justify whether this stock is fairly valued, undervalued, or overvalued in the market.
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