Trendy DotCom is a relatively-newly-listed tech stock. The company has announced that its forecasted annual dividend (to

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Trendy DotCom is a relatively-newly-listed tech stock. The
company has announced that its forecasted annual dividend (to be
paid in one year) is $1 per share. The current market price of
Trendy DotCom is $6.67. You are an analyst trying to get a feel for
the “logic” of the market valuation of Trendy. You decide to use
the constant growth in dividends model, and make the assumption
that Trendy's dividends will grow at a rate of 10% p.a. As an
analyst specialising in tech stocks, you know that firms similar to
Trendy DotCom usually trade at an earnings multiple of 5. Trendy's
most recent earnings-per-share (EPS) figure is $2.00. Given the
industry earnings multiple of 5. What is Trendy’s required rate of
return and is trendy share undervalued or overvalued relative to
other stocks in the industry? a. 20% and undervalued b. 25% and
undervalued c. 25% and overvalued d. 24% and cannot be
determined.
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