The risk-free rate of return is 8%, the expected return of 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. Xyrong is expected to earn an average of 20% per year on its incremental reinvested earnings forever.
What is the expected return of Xyrong’s shareholders?
What is the present value of Xyrong’s stock?
What is the value of Xyrong’s stock expected to be in one year?
What proportion of an investor’s return is expected to come from capital gains? From dividend yield?
What should Xyrong’s management do to increase the value of its shares? Why?