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X-Ray Inc. recently paid its annual dividend of $3, and reported an ROE of 15%. The firm pays out 50% of earnings as dividends. Based on your analysis, you estimate that the stock has a required return of 15.5%. What is the intrinsic value of this stock?

Respuesta :

Answer:

$40.31

Explanation:

The computation of the intrinsic value is shown below:-

Before this we need to determine the growth rate which is

Growth rate = (1 - payout ratio) × ROE

= ( 1 - 50% ) × 15%

= 7.5%

Now the price of the stock is

= D1 ÷ (required rate of return - growth rate)

= D0 × (1 + growth rate) ÷  (required rate of return - growth rate)

= $3 × (1 + 7.5%) ÷ (15.5% - 7.5%)

= 3.225 ÷ 8%

= $40.31

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