Answer the following independent questions.

1. You are using a two-stage DDM and the CAPM to value stocks. You are given the information that risk-free rate =3.5% and expected market return = 13.5%. The target firm has a beta of 1.35. The dividend per share paid last year was $1.35. The estimated annual dividend growth rates are 12% for the first three years and 7% thereafter. What is the intrinsic value of the target firm? 
2. One company has an ROE of 9%, a beta of 1.25, and a policy of paying out two-thirds of its earnings as dividends to shareholders. The expected earnings would be $3.09 per share, and the company just paid its annual dividend. It is expected that the annual market return is 14%, and the treasury bill currently pays a 6% annual yield. Suppose the company now makes an announcement that it will cut its dividend payout ratio to 1/3. What is the return around the announcement? 

Answer rating: 100% (QA)

The intrinsic value of the target firm is 3013 Intrinsic va... View the full answer