Answered step by step
Verified Expert Solution
Question
1 Approved Answer
Consider a firm with a ROE of 12%. The earnings next year are projected at $50 per share, and the firms earnings retention ratio is
Consider a firm with a ROE of 12%. The earnings next year are projected at $50 per share, and the firms earnings retention ratio is 0.70. The required rate of return is 10%. Compute the following for the firm:
- Intrinsic value
- Intrinsic P/E
- Tangible P/E value (Hint: Tangible value = Expected earnings/discount rate, i.e., the present value of the firms stock if its growth rate is zero. Tangible P/E value = Tangible value divided by earnings per share. Therefore, Tangible P/E value = 1 divided by discount rate)
- Present value of growth opportunity (PVGO)
- Franchise value (Hint: Franchise value = PVGO divided by earnings per share. Also note that Tangible value + Franchise value = Intrinsic P/E)
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