Determine intrinsic value of the stock

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AAS Inc. paid the last year dividend of 7 USD per share while EPS was 10 USD. Return on equity was 25% and will be stable in the near future. Payout ratio is expected to increase linearly until it will level off at 80% in year 4. Financial department expects that return on equity will decrease to 15% starting from year 4. Risk-free rate is 10%. Return on the market portfolio is 20%. AAS has also attracted perpetual debt with annual interest payment of 1 USD per share at the beginning of this year to pay compensation for the lost lawsuit. Covariance between market index and AAS shares return is 10%, standard deviation of the market portfolio return is 25%. Corporate tax rate is 20%.

1. Determine intrinsic value of the stock.

2. Determine present value of growth opportunities and value of assets in place.

3. Is it possible for a firm to show positive free cash flows but be in trouble? Explain.

Reference no: EM131942957

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