The market consensus is that SuperSmart Corporation has ROE = 16% and a beta of

Question

The market consensus is that SuperSmart Corporation has ROE = 16% and a beta of 1.25, and an expected earnings per share (E1) of $3.16. The market believes that Super Smart Corporation plans to maintain indefinitely its retention ratio (b) of 80%. The expected market return for the coming years is 13%, and risk free assets (10-year Treasury notes) are yielding 5%. (a) Find the intrinsic value estimate of SuperSmart stock according to the constant growth DDM . (b) Calculate the present value of growth opportunities

Explanation / Answer

dividend amount = ( 1 - 0.8) * 3.16 = 0.632

return = 5 + 1.25 * ( 13 - 5) = 15 %

g = 0.8 * 16 = 12.8 %

intrinsic value = 0.632/( 0.15 - 0.128) = 28.727

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