Question

ABC Corp. has an ROE of 8% and reinvests 40% of its net income. ABC has...

ABC Corp. has an ROE of 8% and reinvests 40% of its net income. ABC has just paid an annual dividend of $0.25.

ABC stock has a beta of 1.1. The risk-free rate is 2.8% and the expected return on the market portfolio is 7%.

What is the appropriate discount rate?

What is the expected growth rate of dividends?

What is the intrinsic value (fair price) of ABC stock?

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Homework Answers

Answer #1

1)Discount rate = Rf + [Beta (Rm-Rf)]

                 = 2.8+ [1.1I(7-2.8)]

                = 2.8 + [1.1*4.2]

               = 2.8+ 4.62

               = 7.42%

2)Growth =ROE * Retention ratio

            = 8* 40%

            =3.2%

3)Intrinsic value =D0(1+g)/(Rs-g)

         =.25 (1+.032)/(.0742-.032)

         = .25 *1.032/ .0422

        = $ 6.11 per share

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