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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:

  1. Intrinsic value
  2. Intrinsic P/E
  3. 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)
  4. Present value of growth opportunity (PVGO)
  5. Franchise value (Hint: Franchise value = PVGO divided by earnings per share. Also note that Tangible value + Franchise value = Intrinsic P/E)

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