Company is expecting to earn $6 next year

Finance Dec 27, 2020

Company is expecting to earn $6 next year. The expected ROE is 18%. The dividend payout ratio is 30%. If the market cap rate is 14%, what is the firm intrinsic value?

$75.00
$101.11
$128.57
$142.87

Expert Solution

intrinsic value=D1/(market cap rate-growth rate)

D1=$6*dividend payout ratio=6*30%=1.8

growth rate=(1-dividend payout ratio)*ROE=(1-30%)*18%=12.6%

intrinsic value=1.8/(14%-12.6%)=128.57

Option C is correct

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