One of your colleagues has recommended that you buy 10 shares in a certain company, say, ABC Ltd. He tells you that the company has a good track record of paying regular dividend every year and the dividends are likely to grow at a rate of 4% per year on an average for the foreseeable future. The next dividend is expected to be $1.50 per share and the shares are selling in the secondary market for $28.50 per share. As per your financial plans and life profile, you feel that any risky investment like in shares of a company, should earn at least 9% per annum. Compute the intrinsic value of the share (Intrinsic value of any financial instrument is the value that it should sell for in the market). Will you buy these shares? Discuss your reasons and support your reasoning with relevant computations.

One of your colleagues has recommended that you buy 10 shares in a certain company, say, ABC Ltd. He tells you that the company has a good track record of paying regular dividend every year and the dividends are likely to grow at a rate of 4% per year on an average for the foreseeable future. The next dividend is expected to be $1.50 per share and the shares are selling in the secondary market for $28.50 per share. As per your financial plans and life profile, you feel that any risky investment like in shares of a company, should earn at least 9% per annum. Compute the intrinsic value of the share (Intrinsic value of any financial instrument is the value that it should sell for in the market). Will you buy these shares? Discuss your reasons and support your reasoning with relevant computations.

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter7: Common Stock: Characteristics, Valuation, And Issuance

Section: Chapter Questions

Problem 8P

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Question

As per your financial plans and life profile, you feel that any risky investment like in shares of a company, should earn at least 9% per annum.

Compute the intrinsic value of the share (Intrinsic value of any financial instrument is the value that it should sell for in the market). Will you buy these shares? Discuss your reasons and support your reasoning with relevant computations.

Expert Solution