The question is below.
Gordon Model is:
PO= Do (1+g) =d1
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.
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 ...
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.