Find the intrinsic value of the stock of company ABC using the following data: r
ID: 2660437 • Letter: F
Question
Find the intrinsic value of the stock of company ABC using the following data:
risk free rate = 5%
market risk premium = 8%
Expected market return = risk free rate + market risk premium
beta = 0.9
ROE = 12.5%
dividend payout ratio = 0.22
Dividends for the next 4 years are expected to be .59, .67, .76, .85. Subsequent growth will be at the computed growth rate, g.
Suggestion:
1. Find g from ROE and payout ratio
2. Find k from CAPM
3. Find price of ABC 4 years out using the constant growth DDM
4. Find intrinsic value by discounting each annual dividend by (1+k)^n where n=number of years, summing them and adding the price in step 3 discounted by (1+k)^4.
Explanation / Answer
g = (1-div payout ratio)*ROE
=(1-0.22)*0.125
=9.75%
cost of equity k = 5%+0.9*8% =12.2% (by CAPM)
=> intrinsic value of stock using constant growth DDM =
=0.59/(1+0.122) +0.67/(1+0.122) +0.76/(1.0122)+0.85/(1+0.122)+0.85*(1+0.0975)/((0.122-0.0975)*(1+0.122)^4)
=$26.6576
=$26.66 (appx)
ans:$26.66
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