Answer:
The intrinsic value of a share of Xyrong stock = $68.075.
the expected one-year holding-period return on Xyrong stock = 0.27716.
Explanation:
Without mincing words, let's dive straight into the solution to the question above:
The intrinsic value of a share of Xyrong stock can be calculated as given below;
The intrinsic value of a share of Xyrong stock = [ (1 + growth rate) × G° ] ÷ (cost of equity - growth rate). -------------------(1).
=> Where, growth rate = 16%( 1 - 0.4) = 9.6% = 0.96.
=> Cost of equity = 2.8( 14 - 7.5) + 7.5 = 25.7% = 0.257.
Thus, slotting in the values into the equation (1) above, we have;
The intrinsic value of a share of Xyrong stock = [ (1 + growth rate) × G° ] ÷ (cost of equity - growth rate).
The intrinsic value of a share of Xyrong stock = [( 1 + 0.96) × 10] ÷ (0.257 - 0.96) = $68.075.
Hence, the expected one-year holding-period return on Xyrong stock = G° × ( 1 + growth rate) + [ (The intrinsic value of a share of Xyrong stock) × (1 + growth rate )] - market price of share ÷ market price of share.
= [ 10 × ( 1 + 0.96) + {$68.075 × (1 + 0.96)} - 67] ÷ 67 = 0.27716.
