ESSEN.OF.INVESTMENTS+CONNECT
ESSEN.OF.INVESTMENTS+CONNECT
10th Edition
ISBN: 9781260361605
Author: Bodie
Publisher: MCG
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Chapter 13, Problem 23PS

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

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ESSEN.OF.INVESTMENTS+CONNECT

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Dividend disocunt model (DDM); Author: Edspira;https://www.youtube.com/watch?v=TlH3_iOHX3s;License: Standard YouTube License, CC-BY