You are an equity portfolio manager and are considering an investment in Trustworthy Ltd. Trustworthy has...

Transcribed Image Text:

You are an equity portfolio manager and are considering an investment in Trustworthy Ltd. Trustworthy has 200 million shares outstanding, which are currently traded at $40 per share. The company maintains a 40% dividend payout ratio over time. You forecast the company's ROE on reinvested earnings will stay stable at 25%. Your earnings per share forecast for next year is $2.8. Trustworthy has a cost of equity of 18%. (a) (5 marks) What is your dividend discount model valuation of a share in Trustworthy? Should you invest in Trustworthy? Justify. (b) (2 marks) Calculate the present value of growth opportunity in Trustworthy Ltd.? (c) (3 marks) You expect the market price to be equal to the intrinsic value 1 year from now, what is your expected 1-year holding-period return on Trustworthy stock. You are an equity portfolio manager and are considering an investment in Trustworthy Ltd. Trustworthy has 200 million shares outstanding, which are currently traded at $40 per share. The company maintains a 40% dividend payout ratio over time. You forecast the company's ROE on reinvested earnings will stay stable at 25%. Your earnings per share forecast for next year is $2.8. Trustworthy has a cost of equity of 18%. (a) (5 marks) What is your dividend discount model valuation of a share in Trustworthy? Should you invest in Trustworthy? Justify. (b) (2 marks) Calculate the present value of growth opportunity in Trustworthy Ltd.? (c) (3 marks) You expect the market price to be equal to the intrinsic value 1 year from now, what is your expected 1-year holding-period return on Trustworthy stock.