Evaluate Verizon (VZ) common stock. The current price of VZ is $44.20 per share. Last year, earnings were $4.32 per share and dividends paid were $2.60 per share.
The beta of VZ is 0.88; the long term expected constant growth rate for VZ is 3.0%. The trailing (ttm) P/E ratio is equal to 10.23.
The risk-free rate is 2.8% (10 year Treasury) and expected market risk premium is 5.70% The tax rate for VZ is 32%.
a) What is the forward P/E ratio for Verizon?
b) What is the required rate of return on VZ stock according to the CAPM?
c) What is the expected rate of return on VZ stock according to the dividend growth model, using the current (market) stock price of $44.20?
d) Is VZ stock overvalued or undervalued? Explain (briefly).