You are considering a purchase of NotSoGreat Company Inc.'s stock, currently available on the NYSE for $70

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Question:

You are considering a purchase of NotSoGreat Company Inc.'s stock, currently available on the NYSE for $70 a share.

You have calculated that for this investment the required rate of return is 11.3% and the past dividends were growing in accordance with the GDP growth. The economy is expected to grow 2.5% in the foreseeable future. The latest dividend was $5 per share.

How much is the stock worth?

To calculate the present value of a company with a dividend policy with stable growth, you can use the Gordon Model, which states that:

One share of the NotSoGreat Company is worth $58.24, which is less than the current market price of $70. In this case, you decide not to invest.

Questions:

You are considering a purchase of UnderDog Inc.'s stock, currently available on the NYSE for $105 a share.

You have calculated that for this investment the required rate of return is 11.3% and the past dividends were growing in accordance with the GDP growth. The economy is expected to grow 2.0% in the foreseeable future. The latest dividend was $10 per share.

1) How much is the stock worth?

2) What if the GDP growth suddenly increased to 3%?