Purchase Solution

Estimating the intrinsic value of the given stock

Not what you're looking for?

Ask Custom Question

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.

Purchase this Solution
Solution Summary

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

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 provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
Recent Feedback
  • "Thank you"
  • "Really great step by step solution"
  • "I had tried another service before Brain Mass and they pale in comparison. This was perfect."
  • "Thanks Again! This is totally a great service!"
  • "Thank you so much for your help!"
Purchase this Solution
Free BrainMass Quizzes
MS Word 2010-Tricky Features

These questions are based on features of the previous word versions that were easy to figure out, but now seem more hidden to me.

Learning Lean

This quiz will help you understand the basic concepts of Lean.

Paradigms and Frameworks of Management Research

This quiz evaluates your understanding of the paradigm-based and epistimological frameworks of research. It is intended for advanced students.

Social Media: Pinterest

This quiz introduces basic concepts of Pinterest social media

Writing Business Plans

This quiz will test your understanding of how to write good business plans, the usual components of a good plan, purposes, terms, and writing style tips.

View More Free Quizzes
Related BrainMass Solutions

  • How do you calculate the expected intrinsic value of the stock for Xavier Company?

    179843 Stock Price and Intrinsic Value An analyst is estimating the intrinsic value of the stock of Xavier Company. The analyst estimates that the stock will pay a dividend of $1.75 a share at the end of the year (that is, = $1.75).

  • Stock's current intrinsic value

    The required return on WWW's stock is 9.00%. What is the best estimate of the stock's current intrinsic value?

  • Ten definitions of the value of a stock for Dr. Washington

    440168 Ten definitions of the value of a stock for Dr. Washington Given that Dr. Washington wants to make stocks a major part of his investment portfolio, you decide to focus on how to analyze stocks.

  • Finance, WACC, beta, portfolio returns etc.

    pricing model (CAPM) is a tool used for estimating returns, of a share, after its risk has been given.

  • What are three key inputs to the valuation model?

    The value so arrived at by discounting the cash flows would be the intrinsic value since it is based on the cash flows of the asset. The market value is the value at which the asset is being traded.

  • Intrinsic Value of Common Stock

    Value of Stock = 0.03045 / (2.5%-1.5%) = $3.045. The solution computes the intrinsic value of common stock.

  • Financial Statement Analysis for Bears, Inc.

    Identify a set of two companies to comparable for estimating the equity intrinsic value of Bears using the PB ratio. Describe your selection process. b.

  • Cost of Capital Measured

    In this case, the CAPM approach will result in an estimated cost of equity that is too low in the sense that if it is used in capital budgeting, projects will be accepted that will not maximize the firm's intrinsic value.

  • Stock Options

    If you were given thar fair value of the stock options, then you will multiply that value with 100 (number of shares) to get the compensation expense.

  • five-year growth rate of IBM

    Adding this to the value generated from the present values of the first five years of dividends, we obtain a stock price of $1534.06. The firm's intrinsic value would be this price multiplied by outstanding shares, which are 1.38B.

View More Related Solutions