1. MF Corp. has an ROE of 15% and a plowback ratio of 20%. If the coming year\'s
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Question
1. MF Corp. has an ROE of 15% and a plowback ratio of 20%. If the coming year's earnings are expected to be $2 per share, at what price will the stock sell? The market capitalization rate is 7%. (Round your answer to 2 decimal places. Do not round intermediate calculations.)
What price do you expect MF shares to sell for in three years? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
2.The risk-free rate of return is 7.0%, the expected rate of return on the market portfolio is 14%, and the stock of Xyrong Corporation has a beta coefficient of 1.3. Xyrong pays out 50% of its earnings in dividends, and the latest earnings announced were $8 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 25% per year on all reinvested earnings forever.
What is the intrinsic value of a share of Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
If the market price of a share is currently $124, and you expect the market price to be equal to the intrinsic value one year from now, calculate the price of the share after one year from now. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is your expected one-year holding-period return on Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
1. MF Corp. has an ROE of 15% and a plowback ratio of 20%. If the coming year's earnings are expected to be $2 per share, at what price will the stock sell? The market capitalization rate is 7%. (Round your answer to 2 decimal places. Do not round intermediate calculations.)
Explanation / Answer
Part -1
The growth rate g = ROE * Plowback ratio = 15%*20% =3% =0.03
Payout ratio = 80% = 0.8*2 = 1.6 = D1; K=7%=0.07
Hence Price P0 = D1/(K-g) = 1.6/(0.07-0.03) = 40
Hence price of MF corp Share is $40
Part B
Three years from now, it will sell at 40*1.15^3 = $60.84
Question -2
Required rate of return of Xyrong is RFR + Beta *(RM-RFR) = 7 + 1.3*(14-7) = 16.1% =0.161
g = ROE * plowback = 25%*50% =12.5% =0.125
D1 = $8 *0.5 =$4
Intrinsic Price of Xyrong is = 4/(0.161-0.125) = $111.11
One year from now, value of share will be 111.11*1.25 = $138.86
One year return will be 138.86-124/124 =11.98%
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