Problem 1. The Duo Growth Company just paid a dividend of $1 per share. The dividend is expected to grow at a rate of 25% for the next 3 years and then level off to 5% per year forever. You think the appropriate market capitalization rate is 20% per year. (3 pts.)

What is your estimate of the intrinsic value of a share of stock?

If the market price of a share is equal to this intrinsic value, what is the expected dividend yield?

What do you expect its price to be 1 year from now? Is the implied capital gain consistent with your estimate of the dividend yield and the market capitalization rate?

Problem 2. Peninsular Research is initiating coverage of a mature manufacturing industry. John Jones, CFA, head of the research department, gathered the following fundamental industry and market data to help in his analysis (3 pts):

Forecast industry earnings retention rate	40%
Forecast industry return on equity	25%
Industry beta	1.2
Government bond yield	6%
Equity risk premium	5%

Compute the price-to-earnings (P₀/E₁) ratio for the industry based on the fundamental data.

Jones wants to analyze how fundamental P/E ratios differ among countries. He gathered the following economic and market data:

Fundamental factors	Country A	Country B
Forecast growth in real GDP	5%	2%
Government bond yield	10%	6%
Equity risk premium	5%	4%

Determine whether each of these fundamental factors would cause P/E ratios to be generally higher for Country A or higher for country B.

Problem 3. A firm has an ROE of 3%, a debt-to-equity ratio of 0.5, a tax rate of 35%, and pays an interest rate f 6% on its debt. What is its operating ROA? (3 pts)