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A stock is currently selling for $40 per share. Based on the last twelve months, this represents a P/E ratio of 12.5 and a dividend yield of 4.8%. After an analysis of all the relevant variables, you estimate that the dividends per share will grow at an annual compound rate of 8% and that the company will maintain the same payout ratio each year as the previous year. The stock is expected to sell at a 15 P/E ratio at the end of the third year. Your required rate of return is 12% per year. Based on a three-year investment horizon and assuming that all your estimates are correct, how much is the stock currently over or under priced?

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Financial Management, Finance

Category:- Financial Management
Reference No.:- M92678943

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