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Driver Products recently paid its annual dividend of $4, and reported an ROE of 15%. The firm pays out 50% of its earnings as dividends. The stock has a beta of 1.15. The current risk-free rate is 2.7% and the market return is 11.00%. Assuming that CAPM holds, what is the intrinsic value of this stock

Respuesta :

Answer: $90.62

Explanation:

First, we need to calculate the expected return. This will be:

= 2.7 + [1.15 × (11 - 2.7)]

= 2.7 × 9.545

= 12.245

= 12.5

We the calculate the growth rate which will be:

= ROE × (1 - payout ratio)

= 15 × (1-0.5)

= 15 × 0.5

= 7.5

The intrinsic value of this stock will then be:

= 4 × (1+0.075) / (0.12245 - 0.075)

= 90.62

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