Question

What is the expected rate of return for this non-constant growth stock? • You have evaluated this stock using your required rate of return of 9% and found its intrinsic value (present value) to be $22.61 per share. . It is trading at (the current market price is) $25.16.

Answer 1

Intrinsic value of a stock can be computed with following equation:

$\textup{Intrinsic value }= \frac{\textup{Expected Cash Flow}}{\textup{required return}}$

putting the values to fine Expected Cash Flow:

$22.61 = \frac{\textup{Expected Cash flow}}{0.09}$

$\textup{Expected Cash flow} = 22.61*0.09$

$\textup{Expected Cash flow} = 2.0349$

And, Current market price of stock can be computed with following equation:

$\textup{Market Price} = \frac{\textup{Expected Cash Flow}}{\textup{Expected rate of return}}$

Putting the values to fine expected rate of return

$25.16 = \frac{2.0349}{\textup{Expected rate of return}}$

$\textup{Expected rate of return} = \frac{2.0349}{25.16}$

$\textup{Expected rate of return} = 0.0808783783783$

$\bg_green \large \textup{Expected rate of return} = 8.09\%$

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.