The risk-free rate of return is 8%, the expected rate of return on the market portfolio is 15%, and the stock of Xyong Corporation has a beta of 1.2. Xyong 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. You expect that Xyong will earn an ROE of 20% per year on all reinvested earnings forever.
(a) What is the intrinsic value of a share of Xyong stock now?
(b) What is the intrinsic value of a share of Xyong stock one year from now?
(c) If the market price of a share is currently $100 and you expect the market price to be equal to the intrinsic value one year from now, what is your expected one-year holding period return on Xyong stock?
