Question

Flora, Inc., reported an EPS of $5.0 this year (t₀). Flora is expected to maintain a retained earnings ratio of 0.5 and ROE of 0.18 for the next five years. After the fifth year, ROE is expected to decrease to 0.08. Applying the cost of equity of 0.13 and the multi-stage growth model, compute the intrinsic price of Flora.

*Round your answer to TWO decimal places.

Answer 1

EPS (t0)= $ 5.0

Expected Constant Retention ratio = 0.50

DPS(t0) = $5.0(1-retention ratio) = $5.0(1-0.50)

= $2.5

Growth rate = ROE*Retention ratio

As, ROE for the next 5 year is 0.18

Growth rate for next 5 year(g1) = 0.18*0.50

= 0.09

ROE after 5th year will decrease to 0.08

Growth rate after 5th year(g2) = 0.08*0.5

= 0.04

Growth rate will be constant thereafter.

Cost of equity (ke) = 0.13

Computing the intrinsic value :

Price = 2.4115 + 2.3261 + 2.2438 + 2.1644 + 2.0878 + 24.1252

Price = $ 35.36

So, Intrinsic price of Flora = $ 35.36

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