Question

The risk-free rate of return is 8%, the expected rate of return on the market portfolio is 15%, and the stock of Xyong Corporation has a beta of 1.2. Xyong pays out 40% of its earnings in dividends, and the latest earnings announced were $10 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyong will earn an ROE of 20% per year on all reinvested earnings forever. If the market price of a share is currently $100 and you expect the market price to be equal to the intrinsic value one year from now, what is your expected one-year holding period return on Xyong stock?

Answer #1

=(D1+P1)/100-1

=(D1+(D2/(r-g)))/100-1

=(E0*(1+g)^1*payout+(E0*(1+g)^2*payout/(r-g)))/100-1

=(E0*(1+ROE*(1-payout))^1*payout+(E0*(1+ROE*(1-payout))^2*payout/(r-ROE*(1-payout))))/100-1

=(E0*(1+ROE*(1-payout))^1*payout+(E0*(1+ROE*(1-payout))^2*payout/(r-ROE*(1-payout))))/100-1

=(E0*(1+ROE*(1-payout))^1*payout+(E0*(1+ROE*(1-payout))^2*payout/(r-ROE*(1-payout))))/100-1

=(10*(1+20%*(1-40%))^1*40%+(10*(1+20%*(1-40%))^2*40%/(8%+1.2*(15%-8%)-20%*(1-40%))))/100-1

=18.5164%

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