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# Stock Valuation

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Problem 1. Your uncle is interested in buying a certain stock, which he says is undervalued and should be worth \$35 per share. He has asked for your help. The stock's dividend, currently at \$1.10, is expected to increase at a rate of 5% per year forever. What should the stock be worth today, assuming a required rate of return of 8.5%?

Problem 2.
You have been following two firms in the health care industry. You expect the dividend payment of both firms to grow at an annual rate of 5%. Dividend payments are currently \$1.00. Stock E is priced at \$10 today, and Stock F is priced at \$11.20 today. What required rates of return were used to price these stocks?

#### Solution Preview

The price of a stock is the present value of dividends and we can calculate it using the dividend discount model
Price (MP) = D1/(Ke-g)
where
D1 = expected ...

#### Solution Summary

The solution explains how to calculate the price of a stock and also the required rate of return. The bond stock valuations are examined.

\$2.19