Answer: $90.62
Explanation:
First, we need to calculate the expected return. This will be:
= 2.7 + [1.15 × (11 - 2.7)]
= 2.7 × 9.545
= 12.245
= 12.5
We the calculate the growth rate which will be:
= ROE × (1 - payout ratio)
= 15 × (1-0.5)
= 15 × 0.5
= 7.5
The intrinsic value of this stock will then be:
= 4 × (1+0.075) / (0.12245 - 0.075)
= 90.62