Stephen used the dividend discount model to determine that the price of a stock should be $23.50. Stephen checks on the internet and finds the latest price quoted for the stock is $27.00. What should he do?
A) Buy the stock at $27.00
B) Sell the stock at $27.00, or sell short if he does not own it
C) Do nothing, as his estimate of the intrinsic value may be off as much as 15%
D) Buy the stock at $23.50 because that is all it is worth

Question

Quizplus · Accepted Answer

If Stephen's valuation using the dividend discount model suggests the stock is worth $23.50, but the market price is $27.00, the stock is overvalued according to his analysis. Therefore, he should sell it if he owns it or consider short selling if he believes the market price will eventually align with his valuation.

Stephen Used the Dividend Discount Model to Determine That the Price