Q4. The risk-free rate of return is 5.0%, the expected rate of return on the mar

Question

Q4. The risk-free rate of return is 5.0%, the expected rate of return on the market portfolio is 16%. and the stock of Xyrong Corporation has a beta coefficient of 1.4. Xyrong pays out 60% of its earnings in dividends, and the latest earnings announced were $7.00 per share. Dividends were Just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 25% per year on all reinvested earnings forever a. What is the intrinsic value of a share of Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "$" sign in your response.) Intrinsic value $4,03-Do-Di:7G+(1,5-46)) Intrinsic value (4.0 b. If the market price of a share is currently $40.00, and you expect the market price to be equal to the intrinsic value 1 year from now, what is your expected 1-year holding-period return on Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places. Omit the "%" sign in your response.) Expected one-year holding-period return

Explanation / Answer

Question b). Solution :- Expected one year holding period return = (74.03 - 40.00) / 40

= 34.03 / 40

= 0.85075 i.e., 85.075 % (Rounded off to 85.08 %)

Conclusion :- Expected one year holding period return = 85.08 % (approx).

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