Market is over-valued-under-valued or correctly priced

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Reference no: EM131913280

Assume the average earnings growth rate on common stock 5.0%. The average dividend payout ratio is 40%, the average earnings on common stock is $7.125, and the average long-run return on common stock is 10.0%. Compute the fair market value of a share of common stock using a Gordon growth DDM for the average markets stock. If the market index equals 5 times the average stock price, and is currently at 300, can you determine whether the market is over-valued, under-valued, or correctly priced? Explain your answer using the numbers you derived.

Reference no: EM131913280

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