The risk-free rate of return is 3.25%,, the expected rate of return on the market portfolio is 13.75%, and the stock of ABC Corp has a beta of 1.3. ABC Corp pays out 35% of earnings in divdends, and the latest earnings announced were $7 per share.
Dividends were just paid and are expected to be paid annually. You expect that ABC will earn an ROE of 18.50% per year on all reinvested earnings forever.
1. What is the intrinsic value of a share of ABC Corp stock?
2. If the market price of a share is currently $76, and you expect the market price to be equal to the intrinsic value one year from now, what is your expected 1-year-holding-period return on ABC Corp stock?