Neco Model Questions Vol1 2021 Commerce Question 14

Two listed companies have the following data:\n\n- Company X: current share price ₦\(250\), earnings per share (EPS) ₦\(20\), dividend payout ratio \(40\%\), expected earnings growth rate \(8\%\) per year.\n- Company Y: current share price ₦\(300\), EPS ₦\(25\), dividend payout ratio \(30\%\), expected earnings growth rate \(12\%\) per year.\n\nAssume dividends grow at the same rate as earnings and that investors require a rate of return of \(15\%\) for both stocks.\n\n(a) Compute the dividend per share for each company.\n(b) Using the Gordon growth model, compute the intrinsic value of each share.\n(c) State which stock is undervalued or overvalued relative to its market price.\n(d) If an investor can buy only one share, which should be chosen based on the highest expected total return (capital gain + dividend) over the next year? Show all calculations.