Company's share price is$38.3 and dividend is $1.39 in this year. Expect company maintain dividend payout...

Company's share price is$38.3 and dividend is $1.39 in this year. Expect company maintain dividend payout ratio as 60.8399% into perpetuity. Assume the return on equity is 10% and the required rate of return is 10% p.a.

What is the intrinsic value of stock now?

What is the present value of the growth opportunity?

Expert Solution

Intrinsic value of stock now = 23.74
Present value of the growth opportunity = 9.84

Explanation:

Growth rate = ROE*retention ratio

Growth rate = 10%*(1-60.8399%)

Growth rate = 3.916%

Intrinsic value of stock now = D0*(1+g)/(r-g)

Intrinsic value of stock now = 1.39*(1+3.916%)/(10%-3.916%)

Intrinsic value of stock now = 23.74

Present value of the growth opportunity = Intrinsic value of stock now - Value of stock without growth oppurtunity

Present value of the growth opportunity = 23.74 - 1.39/10%

Present value of the growth opportunity = 9.84

jeff jeffy answered 2 years ago

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