Find the intrinsic value of the stock of company abc using

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Find the intrinsic value of the stock of company ABC using the following data:

risk free rate = 5%

market risk premium = 8%

Expected market return = risk free rate + market risk premium

beta = 0.9

ROE = 12.5%

dividend payout ratio = 0.22

Dividends for the next 4 years are expected to be .59, .67, .76, .85. Subsequent growth will be at the computed growth rate, g.

Suggestion:

1. Find g from ROE and payout ratio

2. Find k from CAPM

3. Find price of ABC 4 years out using the constant growth DDM

4. Find intrinsic value by discounting each annual dividend by (1+k)^n where n=number of years, summing them and adding the price in step 3 discounted by (1+k)^4

Reference no: EM13567817

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