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Using the Constant (Gordon) Growth Model to Value a Stock (JJH)

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JJH, Incorporated is a stable, mature company that has an average growth rate of 2.0%, demonstrated over roughly five years. It is expected to continue indefinitely. The investor's required rate of return is 2.5%, and JJH is paying a \$0.50 dividend this year. The stock is trading for \$75 per share.

What does the Constant (Gordon) Growth Model say about the company's value in relation to its market price?

A

The market price of the stock matches the model's valuation. The stock is neither under- nor overvalued.

B

The market price of the stock does not match the model's valuation. The stock is undervalued by the stock market and should be trading at a higher price, based upon the Constant (Gordon) Growth Model.

C

The market price of the stock does not match the model's valuation. The stock is overvalued by the stock market and should be trading at a lower price, based upon the Constant (Gordon) Growth Model.

D

The Constant (Gordon) Growth Model is not relevant to these calculations and another model should be used to value the stock.