Question

. Reliable Electric Corp. in Austria has a trailing P/E of 14. Analysts predict that Rliable's dividends will continue to grow at its recent rate of 4.5% per year into the indefinite future. Given a current dividend and EPS of A$0.7 per share and A$2.00 per share, respectively, and a required rate of return on equity of 8%. (12 points) a) What is the intrinsic value of Reliable using GGM? (5 points) b) Based on a trailing P/E of 14, how much is the current market price of Reliable? (4 points) c) Determine whether Reliable Electric Corp. is undervalued, fairly valued, or overvalued. Justify your answer. (3 points)

Answer 1

$ $ EPS current dividend growth rate required return trailing P/E 2.00 0.70 4.50% 8% 14.00 r P/E a) intransic value = Do *(1+g) reg = $ 20.90 b) current market price = EPS * P/E = $ 28.00 c) SINCE , intransic value is much lower than current market price THEREFORE, share is OVERVALUED

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