LED Corp.'s common stock paid $2.50 in dividends last year (D0 ). Dividends are expected to grow at a 12minuspercent annual rate forever. If LED's current market price is $40.00, and your required rate of return is 23 percent, should you purchase the stock?

Question

Hadassah Huerta

Business

1 March, 06:45

LED Corp.'s common stock paid $2.50 in dividends last year (D0 ). Dividends are expected to grow at a 12minuspercent annual rate forever. If LED's current market price is $40.00, and your required rate of return is 23 percent, should you purchase the stock?

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Answers (1)

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Chloe Humphrey · Answer 1

No, you should not purchase the stock as the stock is over priced.

Explanation:

Stock Price should be

Stock Price = Dividend last year / Required Rate of Return

= $2.50 / 23%

= $10.86

The current market price of the stock is $40 so the stock is over priced as it is $10.86 that is why you should not purchase the stock.