The risk- free rate of return is 8 percent, the expected rate of return on the market

Question:

The risk- free rate of return is 8 percent, the expected rate of return on the market portfolio is 15 percent, and the stock of Xyrong Corporation has a beta coefficient of 1.2. Xyrong pays out 40 percent of its earnings in dividends, and the latest earnings announced were $ 10 per share. Divi-dends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 20 percent 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 $ 100, and you expect the market price to be equal to the intrinsic value 1 year from now, what is your expected 1- year holding- period return on Xyrong stock?

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