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Viktor [21]
4 years ago
7

Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The company's dividends are expected to grow at a constant ra

te of 8.5% indefinitely. The required rate of return on this stock is 15.5%. You observe a market price of $78.50 for the stock. Should you purchase this stock
Business
1 answer:
emmainna [20.7K]4 years ago
3 0

Answer:

I would purchase the share as he actual value is more than its current market price

Explanation:

expected dividend in perpetuity =present dividend *growth rate

present dividend is $5.25

growth rate is 8.5%

expected dividend =$5.25*(1+8.5%)

expected dividend=$5.70

in determining the actual value of the stock we the stock price formula below:

price=expected dividend/(expected return-growth rate)

price=$5.70/(15.5%-8.5%)

price=$81.43

In actual terms the stock should be selling for $81.43, hence a buy decision at $78.50 would be a welcoming as the stock is selling beyond its real worth.

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The difference between an American style call and a European style call is that the American style can be exercised any time before the expiration date, while the European style call is only exercised at the date of expiration.

The customer in this question, has a pre-defined point in time when he wishes to exit his long stock postion. Therefore he is selling a "deep in the money" European style call of the stock

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