Answered step by step
Verified Expert Solution
Question
1 Approved Answer
3. (25 points) Alphabet (GOOG) has never paid any dividends and is not expected to pay any dividends until the end of the 8th year.
3. (25 points) Alphabet (GOOG) has never paid any dividends and is not expected to pay any dividends until the end of the 8th year. In the year just ended, GOOG had earnings of $65.6 per share. Its return on equity (ROE) is expected to be 17.3% each year for the next 8 years. From the 9th year on, GOOG's ROE is expected to drop to 12% per year indefinitely. Starting from the end of the 8th year, GOOG is expected to pay out 40% of its earnings as dividends and this dividend payout ratio will continue indefinitely. Assume that GOOG has a beta of 1. Assume also the risk free rate is 1.7% and the market's expected return is 10%. (a) Calculate GOOG's intrinsic value today, V. (b) What is GOOG;s intrinsic value one year from now (V.)? (c) The market price for GOOG today is $1825 per share but the market price is expected to match the intrinsic value of the company one year from now. If someone purchases GOOG today and holds it for a year, what would be the expected holding period return? How does the expected holding period return compare with the required rate of return of GOOG? What does this mean in terms of whether this is a good investment? (d) Based on the situation described and your calculations up to this point, is the market overpricing or underpricing GOOG? Give a brief expla- nation. 3. (25 points) Alphabet (GOOG) has never paid any dividends and is not expected to pay any dividends until the end of the 8th year. In the year just ended, GOOG had earnings of $65.6 per share. Its return on equity (ROE) is expected to be 17.3% each year for the next 8 years. From the 9th year on, GOOG's ROE is expected to drop to 12% per year indefinitely. Starting from the end of the 8th year, GOOG is expected to pay out 40% of its earnings as dividends and this dividend payout ratio will continue indefinitely. Assume that GOOG has a beta of 1. Assume also the risk free rate is 1.7% and the market's expected return is 10%. (a) Calculate GOOG's intrinsic value today, V. (b) What is GOOG;s intrinsic value one year from now (V.)? (c) The market price for GOOG today is $1825 per share but the market price is expected to match the intrinsic value of the company one year from now. If someone purchases GOOG today and holds it for a year, what would be the expected holding period return? How does the expected holding period return compare with the required rate of return of GOOG? What does this mean in terms of whether this is a good investment? (d) Based on the situation described and your calculations up to this point, is the market overpricing or underpricing GOOG? Give a brief expla- nation
Step by Step Solution
There are 3 Steps involved in it
Step: 1
Get Instant Access to Expert-Tailored Solutions
See step-by-step solutions with expert insights and AI powered tools for academic success
Step: 2
Step: 3
Ace Your Homework with AI
Get the answers you need in no time with our AI-driven, step-by-step assistance
Get Started