High Tech Chip Company is expected to have EPS in the coming year of $2.50.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

The intrinsic value of the stock can be calculated using the Gordon Growth Model: P = D1 / (k - g). The dividend per share (D1) is $2.50 * 0.40 = $1.00. The growth rate (g) is ROE * (1 - payout ratio) = 14% * 0.60 = 8.4%. Therefore, P = $1.00 / (0.11 - 0.084) = $38.46.

High Tech Chip Company Is Expected to Have EPS in the Coming