1. You are supposed to analyze the price of Alcoa (ticker: AA) stock TODAY:

Alcoa currently pays an annual dividend of $0.40. ValueLine.com projects for the next 5 years, the dividends are expected to grow at the rate of 6.0% per year. Assume that the dividend in year 6 is expected to grow from D₅ at the rate of 5.5%, and all the subsequent dividends until year 10 will grow at 5.5%. Assume that the dividend in year 11 is expected to grow from D₁₀ at the rate of 5.0% and all the subsequent dividends will grow by 5.0% as well, forever.

Required rate of return: assume that the risk-free rate is equal to 4.9% per year forever and that the market risk premium from 2023 will stay constant forever as well. Assume the measure of economy-wide risk exposure AA is associated with today will stay constant forever as well.

Based on the above information, do you conclude that AA stocks are overvalued (and thus people should sell them before the price drops) or undervalued (and thus people should quickly start buying AA stocks)? Explain why (based on numbers and 1-2 sentences).