Question

Question 13 Tropical Inc. has reported ROE of 0.05 and a dividend payout ratio of 0.7. Its expected earnings for the next year is $4.3 per share, and the market capitalization rate is 0.12. What is Tropical's intrinsic value for today (to)? Assume sustainable growth rate and constant growth DDM. * Round your answer to TWO decimal places.

Answer 1

As per Gordon Growth Model, Growth = (Retention Ratio) * (Return on Equity)

Here, Dividend Payout Ratio = 0.70

Hence, Retention Ratio = (1 - 0.70) = 0.30

Return on Equity Dividend Payout Ratio Retention Ratio Hence, Growth 5% 0.7 0.3 1.5% Expected Earnings for next year Expected Dividend for next year Growth Rate Market Cap Rate 4.30 3.01 1.5% 12% 11 12 Intrinsic Value 28.67

0.05 0.7 Return on Equity Dividend Payout Ratio Retention Ratio Hence, Growth =1-C3 =C4*C2 Expected Earnings for next year Expected Dividend for next year Growth Rate Market Cap Rate 4.3 =C7*C3 =C5 0.12 Intrinsic Value =C8/(C10-09) 12 13

Intrinsic Value of Stock = $28.67