Suppose that ABC stock has an expected dividend per share, E(D1) of $9.27, that the current price is $33, that the expected price at the end of the year is, E(P1), is $30, and that its beta is 1.2. In addition, assume that the risk-free rate is 5% and the expected return on the market portfolio, E(rM ), is 11%.
a) Calculate the intrinsic value of ABC. Relative to the market, is ABC underpriced, overpriced, or fairly valued?
b) Calculate ABC’s ?.
c) Based on your answers above, should you add ABC’s stock to your portfolio? Defend your answer.