Note that earnings grow at the same rate as dividends

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The next year earnings of ABC Company will be $6 per share. ABC Company distributes 50% of its earnings (as dividends) and retain the rest in the company for the first 3 years. After that (starting from the beginning of 4th year), the firm will retain 30% of its earnings in the company, and it will continue to do that forever after. Suppose that the ROE of ABC Company is always 20%, and the CAPM required return for stock ABC is 14%. Note that earnings grow at the same rate as dividends. Based on all the information, what is the intrinsic value of ABC stock today?

Reference no: EM131555484

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