Question

Your broker recommends that you purchase XYZ Inc. at $60. The stock pays a $2.40 dividend which (like its per share earnings) is expected to grow annually at 6.5 percent. If you want to earn 11.5 percent on your funds, is this a good buy

Answer 1

Answer:

XYZ is NOT a good buy.

Step-by-step explanation:

Calculate the market price of stock:

$\frac{Next year's Dividend}{Reqd.return - Growth rate}$

$= \frac{(2.4)(1.065)}{0.115-0.065}$

$= 51.12$

The Market price of the stock is $51. Therefore, buying the stock at $60 is overpriced and is NOT a good buy.