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Intrinsic value of the stock

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Reference no: EM133055979

XYZ Ltd reported the following for the just concluded financial year: earnings per share (EPS) of $5, dividend per share (DPS) of $2 and return on equity (ROE) of 15%. The company is expected to grow at the current rate over the next three years.

Due to the competition from other leading firms in the industry, XYZ's ROE is expected to drop to 10% in year four and the company is expected to increase dividend payout to 60%. The company expects to sustain the new growth rate indefinitely.

Assume that the company reinvests al its retained earnings in new projects.

The beta of XYZ is 1.20. The risk-free rate (rf) and the expected return on the market portfolio (E(Rm)) are 2% p.a. and 10% p.a., respectively.

Using the Capital Asset Pricing Model to determine the required rate of return, what should be the intrinsic value of the stock today?

Reference no: EM133055979

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