Question
In: Finance
The current risk-free rate is 4 percent and the market riskpremium is 6 percent. You...
The current risk-free rate is 4 percent and the market risk premium is 6 percent. You are trying to value ABC company and it has an equity beta of 0.7. The company earned $3.00 per share in the year that just ended. You expect the company's earnings to grow 4 percent per year. The company has an ROE of 12 percent.
What is the value of the stock? Do not round intermediate calculations. Round your answer to the nearest cent.
$
What is the present value of the growth opportunity? Do not round intermediate calculations. Round your answer to the nearest cent.
$
Solutions
Expert Solution
Answer 1)
Retention Ratio = Growth Rate / ROE
= 4% / 12%
= 0.33 OR 33%
Payout Raio = 100% - 33% = 67%
Dividend = Payout Ratio * Earnings
= 0.67 * 3
= 2.01
Required Return as per CAPM = Rf + Beta * (Risk Premium)
= 4% + 0.70 * 6%
= 8.20%
Value of Stock = D 0 * (1+G) / Required Return - G
= 2.01 * (1+0.04) / 0.0820 - 0.04
= 49.77
Answer 2)
PVGO = Stock Price - Earnings / Required Return
= 49.77 - 3 / 0.082
= 13.18
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