A stock is currently selling for $54, pays a dividend of $2.00. Dividends are expected to grow at
a constant rate of 3% a year. Investors require an 6% rate of return.
a. Calculate the intrinsic value (estimated price) for this stock.
b. If an analyst uses an 8% rule
i. At what price range would this stock be considered to be overvalued?
ii. At what price range would this stock be considered to be undervalued?
iii. At what price range would this stock be considered to be fairly priced?
iv. Is this stock overvalued, undervalued, or fairly priced?
v. What is the purpose of employing an 8% rule in this valuation process?