Low Tech Chip Company is expected to have EPS of $2.50 in the coming year.The expected ROE is 14%.An appropriate required return on the stock is 11%.If the firm has a dividend payout ratio of 40%, the intrinsic value of the stock should be

Question

Quizplus · Accepted Answer

Using the dividend discount model, we can calculate the intrinsic value of the stock as P = D1 / (r-g), where D1 is the expected dividend next year, r is the required return, and g is the expected growth rate. We are given D1 = $1.00, r = 11%, and g = 14% * 0.4 = 5.6%. Plugging in these values gives P = $38.46, which is the intrinsic value of the stock. Therefore, the best choice is D.

Low Tech Chip Company Is Expected to Have EPS of $2.50