pose tha t o , and the YT M bond is now 5.8%. Compute the new monas nave passed
ID: 2781753 • Letter: P
Question
pose tha t o , and the YT M bond is now 5.8%. Compute the new monas nave passed of the price of the security. 120 pointsl You have the following data as of December 31st, 2013 for GE. The current stock price is $24.35. Current dividends per share is $0.88 (dividend today), respectively. Market analysts e-timate that dividend growth for the next year should be 7%. The appropriate discount rate for diw..nds is 10.80% per year. Page 1 of 2 Assuming a target one-year price given by analysts of $29.00, compute the fundamental value of GE stock price. If you were a stock analyst, what your recommendation would be? Now assume that the stock can be modeled as a growing perpetuity and that the discount rate stays constant over time. If the long-run growth rate of dividends is 7%, compute the value of the stock using the Gordon's growth model. If you were a stock analyst, what your recommendation would be? a) b) extremely high growthExplanation / Answer
a)Since current price is lower than the target price, stock should be purchased.
Price=$24.35
D0=$.88
According to Gordon Growth model,
Price=.88×1.07/(.108-.07)=24.78
Stock should be purchased as market price is lower than the intrinsic value.
Thank you .