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17 September, 06:14

Praetorian Industries will pay a dividend of $2.50 per share this year and has an equity cost ofcapital of 8%. Praetorianʹs stock is currently trading at $84 per share. By comparing Praetorianwith similar firms, an investor expects that its dividends will grow by up to 5% per year. Whatis the best next step that the investor should take regarding Praetorianʹs stock? A) Sell any Praetorian stock that she owns. B) Short Praetorianʹs stock. C) Revise Praetorianʹs equity cost of capital. D) Revise her estimate of Praetorianʹs dividend growth

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  1. 17 September, 08:32
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    The best next step that the investor should take regarding Praetorianʹs stock is C. Revise her estimate of Praetorian's Dividend Growth

    Explanation:

    Consider the following calculations

    Price = D (1+g) / (r-g) = 2.5 * (1.05) / (0.08-0.05) = $ 87.5

    Hence, the stock is underpriced at $ 84 per share.
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