Star Solutions, Inc. paid a dividend last year of $3.55, which is expected to grow at a constant rate of 3%. Star Solutions has a beta of 1.8 and their stock is currently selling for $31.47. If the market interest rate is 9% and the risk-free rate is 4%, would you purchase Star Solutions' stock?
a. No, because it is overvalued $5.10 c. No, because it is overvalued $9.85
b. Yes, because it is undervalued $5.10 d. Yes, because it is undervalued $9.85
We use the discounted dividend model (DDM) and the CAPM to solve this problem.
Price = dividend/(required rate of return - growth ...
Market Interest Rate and Risk-Free Rate