Suppose that dividends are expected to grow at a rate of 10% per year for ABC, Inc. over the foreseeable future. The stock currently sells for $40 per share, and it recently paid a dividend of $2.50 per share. Currently, the yield on Treasuries is 3%, the market is expected to return 11%, and the beta for ABC is 1.50.
a. Using the above information, what is the required rate of return for ABC?
b. Using the information from above and your calculated required rate of return, what is the intrinsic value of ABC?
c. Based on your calculated intrinsic value for ABC and the information provided above, would it be considered a Buy, a Sell, or Neutral?