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Question
Bensen Co. paid a dividend of $5.25 on its common stock yesterday. The company's dividends are expected to grow at a constant rate of 8.5% indefinitely. The required rate of return on this stock is 15.5%. You observe a market price of $78.50 for the stock. Should you purchase this stock?A) No, the market price is above the intrinsic value of the stock.
B) Yes, the market price is below the intrinsic value of the stock.
C) No, the growth rate in dividends is too far below the required return.
D) Yes, but only if you can keep the stock for at least 5 years.
Answer
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