Question

RRI is an oil company and its shares are currently trading at $60. They just paid annual dividend of $2.90 but due to low oil prices, they are expected to cut their dividends by 20% next year and 12% the following year. However, starting from year 3, anticipated long-run growth rate is 4%. RRI has a beta of 1.4. Market risk premium is 6% and risk-free rate is 2%. Are the RRI shares currently overpriced, or underpriced, or fairly priced?

Answer 1