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Intrinsic value of HP stock

1. The dividends of Charles Schwab Co. are expected to grow indefinitely by 5% per year.
a. If this year's year-end dividend is $8 and the firm's required rate of return is 10% per year, what must the current stock price be according to the DDM?
b. If the expected earnings per share are $12, what is the implied value of the ROE on future investment opportunities?
c. How much is the market paying per share for growth opportunities (i.e. for an ROE in future investments that exceeds the required rate of return securities of this risk class?

2. The risk-free rate of return is 8%, the expected return on the market portfolio is 15%, and the stock of HP has a beta coefficient of 1.2. HP pays out 40% of its earnings in dividends, and the latest earnings announced were $10 per share. Dividends were just paid and are expected to be paid annually. You expect that HP will earn an ROE of 20% on all reinvested earnings forever.
a. What is the intrinsic value of HP stock?
b. If the market price of a share of HP is currently $100, and you expect the market price to be equal to the intrinsic value one year from now, what is your expected one-year holding period return on HP stock?

Solution Preview

1. The dividends of Charles Schwab Co. are expected to grow indefinitely by 5% per year.

a. If this year's year-end dividend is $8 and the firm's required rate of return is 10% per year, what must the current stock price be according to the DDM?

P0= $168.00
Div1= Expected dividend per share next year.
G=Growth 5%
Ke= Cost of equity 10%
Div1= Current dividend *(1+g) =8.4

b. If the expected earnings per share are $12, what is the implied value of the ROE on future investment ...

Solution Summary

The intrinsic value of HP stock is assessed.

$2.19