an analyst gathered the following information about a company: the stock is currently trading at $31.00 per share. estimated growth rate for the next three years is 25%. beginning in the year 4, the growth rate is expected to decline and stabilize at 8%. the required return for this type of company is estimated at 15%. the dividend in year 1 is estimated at $2.00. the stock is undervalued by approximately:

A company is a colloquial phrase for any firm ’s capital certificates. In contrast hand, a share alludes to a certain company's shares certificate. You become a shareholder if you possess shares of a certain corporation. There are two categories of stocks: ordinary and preferred.

Briefing:

You must figure out the stock price.

Any security's current price represents the principal amount of all the future income it will provide, discounted at the needed rate of return.

Current Price of the Share = 31

Dividend (D1) = 2

Growth 25% in next 3 years

Growth 8% from year 4 onwards

Required return (Ke) = 15%

Find Dividend for next 3 year

D1 = 2

D2 = 2 x 1.25 = 2.5

D3 = 2.5 x 1.25 = 3.125

Find Year 2's Terminal Value.

The Gordon Growth Formula, which is frequently used to determine the price of shares with dividend content,

GGn formula = 1.73913043 + 1.89035917 + 33.75641588

Share Price = 37.4 approx.

Under Valuation = 37.4 - 31 = 6.40

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