The Generic Genetic (GG) Corporation pays no cash dividends currently and is not expected to for the

Question:

The Generic Genetic (GG) pays no cash dividends currently and is not expected to for the next 4 years. Its latest EPS was $5, all of which was reinvested in the company. The firm’s expected ROE for the next 4 years is 20% per year, during which time it is expected to continue to reinvest all of its earnings. Starting in year 5, the firm’s ROE on new investments is expected to fall to 15% per year. GG’s market capitalization rate is 15% per year.
a. What is your estimate of GG’s intrinsic value per share?
b. Assuming its current market price is equal to its intrinsic value, what do you expect to happen to its price over the next year?

Corporation
A Corporation is a legal form of business that is separate from its owner. In other words, a corporation is a business or organization formed by a group of people, and its right and liabilities separate from those of the individuals involved. It may...