Question: You are evaluating a stock that does not pay a dividend. The company generates $0.65 of earnings and trades at $29.25. Last year's ROE was

You are evaluating a stock that does not pay a dividend. The company generates $0.65 of earnings and trades at $29.25. Last year's ROE was 4.3%, however the company is undergoing initiatives to boost ROE. They expect ROE to rise by 5.7 percentage points next year, then another 8.4 percentage points the following year and then 4.2 percentage points before leveling off. Once ROE reaches a steady state level, the company intends to initiate a dividend with a payout ratio of 75%. Given a risk free rate of 1.45% and an expected market return of 6.25% and a forecasted beta of 1.89 estimate the intrinsic value of the stock.

Using the information from the previous question. Assume you were to buy the stock for the current price, collect the dividends for two years and sell for the intrinsic value at the end of the second year, calculate your annualized Jensens alpha over the two-year holding period.

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