Common stock assumption

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Common Stock Assumption #1: constant perpetuity

You are analyzing a share of ABC Company common stock for possible purchase. Assume that your analysis has revealed that you expect the stock to pay a constant, semiannual dividend of $25 per share. This dividend is expected to continue into the foreseeable future (i.e., forever). Your required rate of return on this stock is 14% per year, compounded semiannually. Further research reveals that this common stock has a market price of $400 per share.

A. Draw a time line showing the next four dividends for this common stock.

B. Calculate the value of this common stock based on the required rate of return.

C. Calculate the expected return on this common stock based on the market price.

D. Should you invest in the stock? Why or why not? Be sure to use your results from BOTH parts B and C above

Reference no: EM133120368

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