Explore BrainMass

Stock Valuation

This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

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.

© BrainMass Inc. brainmass.com June 4, 2020, 2:12 am ad1c9bdddf
https://brainmass.com/business/discounted-cash-flows-model/using-gordon-model-conduct-stock-valuation-446251

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.

\$2.19