In some scenarios, HW 11, #8 (Problem 18-18) is not worded correctly. To find th

Question

In some scenarios, HW 11, #8 (Problem 18-18) is not worded correctly. To find the proper solution, you must assume that the market capitalization rate (i.e., the discount rate) is equal to the ROE in year 5. In other words, ignore the stated market capitalization rate.

McGraw Hill has been informed of the discrepancy.

****Does this help any? This message was sent from my professor.

HW11 (Ch 18) 6 8 Problem 18-18 The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the next four years. Its latest EPS was $660, all of which was reinvested in the company. The firm's expected ROE for the next four years is 23% per year, during which time it is expected to continue to reinvest all of its earnings. Starting in year 5, the firm's ROE on new investments is expected to fall to 18% per year GG's market capitalization rate is 22% per year. points a. What is your estimate of GG's intrinsic value per share? (Round your answer to 2 decimal places.) eBook GG's intrinsic value Print b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year? References at a rate ofover the next year Price should Reference links

Explanation / Answer

Statement showing EPS over 5 years

P5 = 18.58/Ke

=18.58/0.22

=$84.46

Po = 84.46*1/PVIF(22%,5years)

=84.46*0.37

=31.25$

Thus intrinsic value = 31.25$

b) Price should increase at rate of 22% over next year so that HPR will equal K

Year EPS 1 8.12(6.6*1.23) 2 9.99(8.12*1.23) 3 12.2(9.99*1.23) 4 15.11(12.2*1.23) 5 18.58(15.11*1.23)

Related Questions

Navigate

• Browse (All)
• Browse I
• Subjects

---

---

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.