Question
You own the stock of Pettersson and its current price is $36.00/share. It pays no dividend today. Based on your own research, you expect Pettersson
You own the stock of Pettersson and its current price is $36.00/share. It pays no dividend today. Based on your own research, you expect Pettersson to pay its first dividend of $2.50/share at the end of Years 1, 2, and 3 (12, 24, and 36 months from now). Given its performance outlook, you further expect the Board of Pettersson to increase the Year 4 dividend by 10% to $2.75; and then to increase it further by 4% annually for the next 2 years (end of years 5 and 6); after which it will grow by 2.0% annually forever.
You enjoy a number of investment alternatives that will, on average, provide you with a 9% annual return. In light of this, should you buy more Pettersson stock at the current $36 price; or should you sell allyour current Pettersson holdings for $36 and reinvest the proceeds elsewhere?
A. Sell for $36.00 because the intrinsic value is $34.78
B. Sell for $36.00 because the intrinsic value is $35.57
C. Buy for $36.00 because the intrinsic value is $37.75
D. Buy for $36.00 because the intrinsic value is $38.29
E. Buy for $36.00 because the intrinsic value is $38.72
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