Assume the risk-free rate of return and the expected rate of return on market portfolio are 6% and 16%, respectively. Furthermore, suppose ABC with beta of 1.2 pays 40% of its earnings in dividends. It is expected that the company earns ROE of 20% in all its reinvestments. It just had an earning announcement of $10/share and Paid $4/share dividends (year zero).

a. What is the intrinsic value of ABC? 

b. If the market price of ABC is currently $70 and in one year, you expect the market price to be equal its intrinsic value at that time, what is the expected one-year holding period return (HPR) on ABC?

Answer rating: 100% (QA)

a The intrinsic value of ABC can be calculated using the Gordon Growth Model which is a widely used ... View the full answer