As per CAPM, required return = Risk free rate + beta*(market return – risk free rate)
= 10% + 2.1*(15%-10%)
= 20.5%
Growth rate = ROE*Retention Ratio
= 21%*0.5 = 10.5%
Intrinsic Value = Expected Dividend/(Required Return – Growth Rate)
= 20*50%(1+10.5%)/(20.5%-10.5%)
= $110.5
b-1 Price after one year = Price today(1+Required Return) – Dividend after one year
= 109(1.205) – 11.05
= $120.295
b-2 Holding period return = (120.295+11.05-109)/109
= 20.5%
Sheng, Inc. expect to have 21% of return on equity each year. The company's dividend payout...
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