Question

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ABC Corp has a 11.96% return on equity and reinvests (retains) 33% of its profits. What...

ABC Corp has a 11.96% return on equity and reinvests (retains) 33% 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 16.9% and the most recent annual dividend per share (D0) was $2.58?

Expert Solution

Solution:-

Computation of ABC corp. Intrinsic value:

Given,

Return on equity = 11.96%

Retention ratio = 33% or 0.33

Growth rate = Return on equity × Retention ratio

= 11.96% × 33%

= 3.9468%

Current dividend (D0) = $2.58

Expected dividend = $2.58 × (1+0.039468)

= $2.6818

Required return = (D1/ P0) + g

0.169 = ($2.6818 / P0) + 0.039468

$2.6818 / P0 = 0.169 - 0.039468

= 0.129532

P0 = $2.6818 / 0.129532

= $20.7037

Therefore the intrinsic value of ABC corp. Is $20.7037

jeff jeffy answered 2 years ago

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