Question: Exercise 7. The market consensus is that Advanced Micro Devices (AMD) has an ROE = 9%, a beta of 1.25, and plans to maintain indefinitely

Exercise 7. The market consensus is that Advanced Micro Devices (AMD)

Exercise 7. The market consensus is that Advanced Micro Devices (AMD) has an ROE = 9%, a beta of 1.25, and plans to maintain indefinitely its traditional retention ratio of 2/3. This year's earnings were $3 per share. The annual dividend was just paid. The consensus estimate of the coming year's market return is 14%, and T-bills currently offer a 6% return. (a) Find the price at which AMD stock should sell (b) Calculate the forward P/E ratio (c) Calculate the present value of growth opportunities (d) Suppose your research convinces you AMD will announce momentarily that it will im- mediately reduce its retention ratio to 1/3. Find the intrinsic value of the stock Solution

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