The risk-free rate of return is 8.0%, the expected rate of return on the market
ID: 2626736 • Letter: T
Question
The risk-free rate of return is 8.0%, the expected rate of return on the market portfolio is 18%, and the stock of Xyrong Corporation has a beta coefficient of 2.2. Xyrong pays out 30% of its earnings in dividends, and the latest earnings announced were $10.00 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 25% per year on all reinvested earnings forever.
What is the intrinsic value of a share of Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Intrinsic Value
If the market price of a share is currently $25.00, and you expect the market price to be equal to the intrinsic value 1 year from now, what is your expected 1-year holding-period return on Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)
a.What is the intrinsic value of a share of Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.)
Intrinsic Value
b.If the market price of a share is currently $25.00, and you expect the market price to be equal to the intrinsic value 1 year from now, what is your expected 1-year holding-period return on Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.)
Expected one-year holding-period return = ?%Explanation / Answer
Sustainable growth rate of dividends = Retained ernings * retuen on equity
Sustainable growth rate = 70%*25% = 17.5%
Dividends paid = $10*30% = $3.
Reqturn on equity = 8% + 2.2 (18%-8%) = 30%
Price of the stock = 3(1+0.175)/(0.3-0.175) = $24.42 answer
Price of the stock one year from now = $24.42 + $24.42*(0.3-0.175) = $27.4725
Holding period return = (Ending share price + Dividend - Opening share price)/ opening share price *100
Holding period return = ($27.4725 + 3*117.5% - 24,42)/24.42*100 = 26.93% answer
Related Questions
drjack9650@gmail.com
Navigate
Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.