Answer-first summary for fast verification
Answer: undervalued.
This question requires calculating the intrinsic value using the H-model for dividend discounting. The H-model accounts for a period of declining growth rates from an initial high rate to a perpetual growth rate. **Given:** - D0 = €2.00 - gs = 20% (initial growth rate) - gL = 5% (perpetual growth rate) - r = 15% (required return) - N = 8 years (transition period) - Current price = €33.50 **H-model formula:** V0 = [D0 × (1 + gL)] / (r - gL) + [D0 × H × (gs - gL)] / (r - gL) Where H = N/2 = 8/2 = 4 **Calculation:** V0 = [2.00 × (1 + 0.05)] / (0.15 - 0.05) + [2.00 × 4 × (0.20 - 0.05)] / (0.15 - 0.05) V0 = [2.10] / 0.10 + [2.00 × 4 × 0.15] / 0.10 V0 = 21.00 + [1.20] / 0.10 V0 = 21.00 + 12.00 = €33.00 **Fair value range:** +/- 10% of €33.00 = €29.70 to €36.30 Current price €33.50 is within this range, so the stock is fairly valued. **Answer: B**
Author: LeetQuiz Editorial Team
Ultimate access to all questions.
No comments yet.
The analyst considers a security trading within a band of +/- 10% of her estimate of intrinsic value to be fairly valued. If the required return is 15%, the common stock is:
A
undervalued.
B
fairly valued.
C
overvalued.