Chapter 9, Problem 7DQ

The required return on equity, r_s, is the final input needed to estimate intrinsic value. For our purposes, you can assume a number (say, 9% or 10%) or you can use the CAPM to calculate an estimate of the cost of equity, using the data available on the Internet (For more details, look at the Taking a Closer Look exercise for Chapter 8.) Having decided on your best estimates for D₁, r_s, and g, you can calculate XOM’s intrinsic value. Be careful to make sure that the long-run growth rate is less than the required rate of return. How does this estimate compare with the current stock price? Does your preliminary analysis suggest that XOM is undervalued or overvalued? Explain.