Please show all work. You are responsible for valuing QXR Corporation, given the

Question

Please show all work.

You are responsible for valuing QXR Corporation, given the following data: current EPS = $4.00; current payout ratio = 40%, ROA = 20%; beta = 1.2; debt/equity ratio = 0.75; interest rate on debt = 12%; annualized 6-month T-bill rate = 8%; number of shares outstanding = 100,000. You expect the firm to grow at 8% after the first five year, with the ROA declining to 15%. You also know that QXR has substantial real estate holdings that are currently unutilized and can be sold for $1,000,000. What is your estimate of QXR's intrinsic value? Assume a market rate of return of 15%.

Explanation / Answer

The rate of return of the stock is given by CAPM as in Ra = Rf + beta*(Rm - Rf)

Rf = 8%, beta = 1.2 and Rm =15%

So Ra = 8 + 1.2*(15-8) = 16.4%

Now the intrinsic value of the stock is given by Dividend distribution model as in P0 = D1/(ke -g)

Dividend (Current ) = EPS * payout ratio = 4 * 0.4 =1.6

Hence D1 = 1.6 * 1.08 = 1.728

Ke =16.4% = 0.164

g = 0.08

Hence Instinsic value = 1.728/(0.164-0.08) = $20.57

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