Problem:
A company's common stock is selling for $16. The stock just paid a dividend (D0) of $.60 and this dividend is expected to grow by 15% per year for three years. After that it will grow at a constant rate of 4%. The stock's beta is 1.7, the risk-free rate of interest is 1.75% and the market risk premium is 5.25%.
Required:
Question: According to the DCF model, what is the intrinsic value of the stock today? Given the current stock price today (P0 = $16), should you buy the stock and briefly explain why or why not?
Note: Please provide reasons to support your answer.