Praetorian Industries will pay a dividend of $2.50 per share this year and has an equity cost ofcapital of 8%. Praetorianʹs stoc

Question

3 years ago

10

Praetorian Industries will pay a dividend of $2.50 per share this year and has an equity cost ofcapital of 8%. Praetorianʹs stoc

k is currently trading at $84 per share. By comparing Praetorianwith similar firms, an investor expects that its dividends will grow by up to 5% per year. Whatis the best next step that the investor should take regarding Praetorianʹs stock?A) Sell any Praetorian stock that she owns.B) Short Praetorianʹs stock.C) Revise Praetorianʹs equity cost of capital.D) Revise her estimate of Praetorianʹs dividend growth

Business

1 answer:

Alenkinab [10] · Answer 1 · 2022-08-11T15:50:24+03:00

Answer:

The best next step that the investor should take regarding Praetorianʹs stock is C. Revise her estimate of Praetorian's Dividend Growth

Explanation:

Consider the following calculations

Price = D (1+g)/ (r-g) = 2.5*(1.05)/(0.08-0.05) = $ 87.5

Hence, the stock is underpriced at $ 84 per share .