The risk-free rate of return is 6.5%, the expected rate of return on the market portfolio is 17%, and the stock of Xyrong Corporation has a beta coefficient of 1.8. Xyrong pays out 40% of its earnings in dividends, and the latest earnings announced were $8.50 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 (round to 2 decimal places)? Intrinsic value $? b. If the market price of a share is currently $35, and you expect the market price to be equal to the intrinsic value one year from now, what is your expected 1-year holding-period return on Xyrong stock (round to 2 decimal places)? Expected one-year holding-period return ?%
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
The risk-free
a. What is the intrinsic value of a share of Xyrong stock (round to 2 decimal places)?
| Intrinsic value | $? |
b. If the market price of a share is currently $35, and you expect the market price to be equal to the intrinsic value one year from now, what is your expected 1-year holding-period return on Xyrong stock (round to 2 decimal places)?
| Expected one-year holding-period return | ?% |
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