The risk-free rate of return is 5%, the expected rate of return on the market portfolio is 16%, and the stock of Xyrong Corporation has a beta coefficient of 1.4. Xyrong pays out 60% of its earnings in dividends, and the latest earnings announced were $7.00 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 25% per year on all reinvested earnings forever.

a.What is the intrinsic value of a share of Xyrong stock?

b.If the market price of a share is currently $40, and you expect the market price to be equal to the intrinsic value one year from now, what is your expected 1-year holding-period return on Xyrong stock?