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Estimating the intrinsic value of the given stock

Find the intrinsic value of the stock of company ABC using the following data:

risk free rate = 5%
market risk premium = 8%
Expected market return = risk free rate + market risk premium
beta = 0.9
ROE = 12.5%
dividend payout ratio = 0.22

Dividends for the next 4 years are expected to be .59, .67, .76, .85. Subsequent growth will be at the computed growth rate, g.

Solution Preview

ROE=12.5%
Payout ratio=0.22
Sustainable Growth rate=g=ROE*(1-payout ratio)=12.5%*(1-0.22)=9.75%

beta=b=0.90
Risk free rate=krf=5%
Market risk premium=krp=8%
Expected return of the stock=k=krf+b*krp=5%+0.9*8% ...

Solution Summary

Solution estimates the intrinsic value of the stock in the given case.

$2.19