(Stocks) ABC Corp has a 14.18% return on equity and reinvests (retains) 37% of its profits....

(Stocks) ABC Corp has a 14.18% return on equity and reinvests (retains) 37% of its profits. What is the intrinsic value of the company's share of stock, to the nearest penny, if the required rate of return is 16.21% and the most recent annual dividend per share (D0) was $2.55? If your answer is, e.g., $45.365, record it as 45.37.

Expert Solution

Constant growth dividend discont model

g = ROE * retention ratio

g = 14.18% * 37%

g = 0.052466

D1 = D0 * (1 + g)

D1 = 2.55 * (1 + 0.052466)

D1 = 2.6837883

Intrinsic value = D1/(r - g)

Intrinsic value = 2.6837883/(0.1621 - 0.052466)

Intrinsic value = 2.6837883/0.109634

Intrinsic value = $24.4795255122

Answer: 24.48

jeff jeffy answered 2 years ago

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