Question
You just received your tax refund (wow - it's so nice of you to lend the U.S. government money at zero percent interest!) and you
You just received your tax refund (wow - it's so nice of you to lend the U.S. government money at zero percent interest!) and you are looking to add a stock to your portfolio - you just don't want to overpay - so you decide to estimate the price of your next stock using the Gordon Model (Bet it's in your text in chapter 7 AND in the notes we wrote for that chapter). You are looking at XYZ Corp (OK - so I ran out of dead things) and it expects to pay a dividend of $2.50. XYZ's earnings are growing at an annual rate of 5% - last year's net income topped $1.5 million on sales of just $10 million. You do have some standards for any stock however. You have established a required rate of return for any stock added to your portfolio to be 13%. With this information at your disposal, what should you expect to pay for a share of XYZ? Hint: IF you decide it might be a good idea to do something with those two percentages in this problem, make sure you change them to decimals when you plop them into the appropriate formula.
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