Question
The risk-free rate of return is 7.5%, the expected rate of return on the market portfolio is 14%, and the stock of Xyrong Corporation has
The risk-free rate of return is 7.5%, the expected rate of return on the market portfolio is 14%, and the stock of Xyrong Corporation has a beta coefficient of 2.8. Xyrong pays out 40% of its earnings in dividends, and the latest earnings announced were $25 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 16% per year on all reinvested earnings forever.
a. What is the intrinsic value of a share of Xyrong stock?
b-1. If the market price of a share is currently $67, and you expect the market price to be equal to the intrinsic value one year from now, calculate the price of the share after one year from now.
b-2. What is your expected one-year holding-period return on Xyrong stock?
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