Kokoliko PLC has maintained a constant dividend pay-out ratio over the last 5 years and intends to continue with the same ratio into the future. Last year EPS was $80 and $32 was paid out as dividends while the P/E ratio was 8. Kokoliko has a standard deviation of 4% and a beta of 1.3. Over the coming year, the following are expected:?
ROE of 15% ?
Return on Government securities of 7% ?
LuSE index return of 12%
Required:
i. Compute the expected growth rate in internal earnings.
ii. Compute the market price of Kokoliko’s shares last year.
iii. Based on the expected values, compute the intrinsic value of Kokoliko’s share and determine if the shares are over-valued or undervalued given a market price of $50 today.