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    Stock Valuation

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    The question is below.
    Gordon Model is:

    PO= Do (1+g) =d1
    ri-g ri-g

    Here is the question:

    Your local stockbroker is recommending that you purchase a stock with a current market price of $57. This stock paid dividends last year of $4.00 and forecasts a future growth rate in dividends and earnings of 10%. Your required rate of return on this stock is 18%. From a valuation standpoint you should (please display all work)

    a. Not buy the stock; it is overvalued by $2.00
    b. Not buy the stock; it is overvalued by $7.00
    c. Buy the stock; it is undervalued by $2.00
    d. Buy the stock; it is undervalued by $7.00
    e. Buy the stock; its fairly valued.

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    Solution Preview

    The discount dividend model (aka the Gordon model) states:

    Price = dividend/(return rate - growth rate).

    This model assumes that the dividend is paid at the ...

    Solution Summary

    This solution shows how to use the Gordon model to conduct a stock valuation in order to decide whether or not to buy a particular stock that your stockbroker has recommended to you, taking into account its market price, dividends, projected future growth rate and your required rate of return.