Question

Now the company share price is 39,dividend is 1.2,payout ratio is 60,and the company will mantain this payout ratio into perpetuity,assume that roe is 9.5% same as the required return rate.calculate the intrinsic value of the stock and the PV of the growing opportunity.

Answer 1

Growth rate = Retention Ratio x Return on equity = (1 - 60%) x 9.50% = 3.80%

Intrinsic value of the stock = Dividend₁ (r – g)

Where,

Dividend₁ = Annual dividend at the end of year 1.

r = Required rate of return

G is the long term growth rate

Intrinsic value = 1.20 (1 + 3.80%) (9.50% – 3.80%) = 21.85

Earning per share = Dividend per share Payout ratio = 1.2 0.60 = 2.0  

Present Value of Growth Opportunity (PVGO) = Value of stock – (earnings cost of equity)

= 39 - (2.0 9.50%)

PVGO = 17.95