Talukdar’s theoretical stock price

by | Mar 3, 2023 | finance

 

 

1. The earnings, dividends, and stock price of Talukdar Technologies Inc. are expected to grow at 7 percent per year in the future. Talukdar’s last dividend was
$2.00, the stock beta is 1.6, the risk-free rate is 9 percent, and the average return on the market is 13 percent.
a. Compute Talukdar’s theoretical stock price.
b. Given your conclusion about the theoretical stock price of Talukdar Technologies stock price, do you (or should you) have any reservations about the
validity of your conclusion? Explain.
2. Suppose a particular stock has a higher price than what it normally should be in market equilibrium. Explain the process by which the stock price will
adjust in an efficient market so that it will be correctly priced.

 

Sample Solution

1a. The formula for calculating the theoretical stock price of Talukdar Technologies Inc. is as follows: Stock Price = D1 / (r – g) where D1 is the next expected dividend, r is the required rate of return, and g is the growth rate of dividends. Plugging in our numbers we get Stock Price = $2 / (0.09 – 0.07) = $33.

Sample Solution

1a. The formula for calculating the theoretical stock price of Talukdar Technologies Inc. is as follows: Stock Price = D1 / (r – g) where D1 is the next expected dividend, r is the required rate of return, and g is the growth rate of dividends. Plugging in our numbers we get Stock Price = $2 / (0.09 – 0.07) = $33.

1b .Yes ,there could be some reservations about validity conclusion reached since calculations based on assumptions like constant growth rates future earnings/dividends which may not always accurate or reliable since actual results can vary significantly from predicted values due unforeseen external factors . Additionally , most accurately predict stock price need take account variables such risk premium associated with particular equity liquidity etc ; however these are difficult calculate precisely thus theory useful guideline but should only treated such when making investment decisions.

2. In an efficient market, if a stock’s price deviates from its equilibrium level then it will eventually adjust itself to reach that point again through buyers and sellers taking advantage of any mispricing opportunities that arise by trading in-demand stocks at their true value so as to maximize their profits. This process will continue until prices adjusted back towards what they would otherwise have been in absence of mispricing i e market equilibrium state thus creating more stability within system by bringing all assets closer fair value

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