I have establushed that the true value is 45.71 and that it should be longed, but dont know the answers to the rest of the question below.
Tiptons's stock has a required return of 12%, and the stock sells for $40 per share. The firm just paid a dividend of $1.00, and the dividend is expected to grow by 30% per year for the next 4 years, so D4 = $1.00*(1.3)4 = $2.8561. After t = 4, the dividend is expected to grow at a constant rate of 5% per year forever. What is the stockâs current true value. Should you long-or-short this security? What return would you expect to obtain from your trade if the stock reverts to the correct price over a 2-year period? What type of a position is this (speculative, value capturing, growth capturing, arbitrage, broker-dealer exchange spread)?
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