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Calculate the intrinsic value for wills company stock

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Reference no: EM132956538

You are currently evaluating Wills company's stock for future potential investment. You have gathered the following information extracted from Wills company's financial statements as of December 31st, 2019:

  • Total current liabilities and long-term liabilities are RM150,000 and RM250,000, respectively.
  • The company also has RM70,000 preferred stocks in its capital structure, while its total assets are RM1,250,000.
  • The total number of common stock outstanding is 200,000.
  • Earnings available to the common shareholders are RM800,000, and it is expected to grow at 4 percent for the first two years and 6 percent for the next two years.
  • The dividend payout ratio remains constant at 40 percent.
  • The cost of equity is 12 percent.
  • As of January 1st, 2020, the Wills company's stock is trading at RM12.50.

Problem a. Calculate the intrinsic value for Wills company's stock in 2020 using the residual income model. Show your workings.

Problem b. Would you buy the company's stock?

Reference no: EM132956538

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