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Amani owns shares in Honda Inc. Currently, the market price of the stock is $36.34. Management...

Amani owns shares in Honda Inc. Currently, the market price of the stock is $36.34. Management expects dividends to grow at a constant rate of 6 percent for the foreseeable future. Its last dividend was $3.25. Amani’s required rate of return for such stocks is 16 percent. She wants to find out whether she should sell his shares or add to her holdings.

  1. What is the value of this stock?
  2. Based on your answer above, should Amani buy additional shares in Honda Inc.?

Why or why not?

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Answer #1

a.

Using Constant Growth Model,

Stock Price = 3.25(1.06)/(0.16 - 0.06)

Stock Price = $34.45

b.

As Stock Price is more than Intrinsic Value of the stock so one should not buy the stock.

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