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The risk-free rate of return is 6.5%, the expected rate of return on the market portfolio is 17%, and the stock of Xyrong Corporation has a beta coefficient of 1.8. Xyrong pays out 40% of its earnings in dividends, and the latest earnings announced were $8.50 per share. Dividends were just paid and are expected to be paid annually. You expect that Xyrong will earn an ROE of 25% per year on all reinvested earnings forever.

a. What is the intrinsic value of a share of Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

b. If the market price of a share is currently $35, 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 Xyrong stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

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Financial Management, Finance

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