Ou are thinking about investing in stock in a company who paid a dividend of $10 this year and whose dividends you expect to grow at 4 percent a year. The risk-free rate is 3 percent and you require a risk premium of 5 percent. If the price of the stock in the market is $200 a share, should you buy it

Yes

Explanation:

To make the decision to buy the share, we first need to calculate the fair value per share today, We can use the Dividend Discount model to estimate today's value of stock based on future cash flow ( dividend ).

The formula for Price is,

We calculate r by adding the risk free rate and stock's risk premium.

r = 3 + 5 = 8%

Now we calculate the stock's fair price today,

P = 10 (1 + 4%) / 8% - 4%  ⇒ $260 / share

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