Chapter 13, Problem 23PS

The risk-free rate of return is $\text{8}\%$ , the expected rate of return on the market portfolio is $\text{15}\%$ , and the stock of Xyrong Corporation has a beta coefficient of $\text{1}.\text{2}$ . Xyrong pays out $\text{4}0\%$ of its earnings in dividends, and the latest earnings announced were $\$\text{1}0$ per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of $\text{2}0\%$ per year on all reinvested earnings forever. $\left(\text{LO 13}-\text{2}\right)$
a. What is the intrinsic value of a share of Xyrong stock?
b. If the market price of a share is currently $\$\text{1}00$ , 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 Xyrong stock?