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What estimate of the stock required rate of return

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XYZ Limited's expected earnings one year from now are $6.00 per share. The company reinvests 50% of its earnings and the Chief Financial Officer (CFO) estimates that the company's Return on Equity (ROE) is 14%.

Question (a) If your estimate of the company's required rate of return on its stock is 10%, what should be the price of the stock?

Question (b) Suppose you observe that the stock is selling for $60.00 per share, and that this is the best estimate of its equilibrium price. What would you conclude about either your estimate of the stock's required rate of return or the CFO's estimate of the company's Return on Equity?

Reference no: EM132595833

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