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If the market price of a share is currently 100 and you

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The risk-free rate of return is 8%, the expected rate of return on the market portfolio is 15%,and the stock of Xyrong Corporation has a beta coefficient of 1.2. Xyrong pays out 40% of its earnings in dividends, and the latest earnings announced were $10 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 20%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?

Reference no: EM13484089

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