A company analyst uses the average of the compounded annual growth rate over the 4-year period and the sustainable growth rate for 2013 in order to estimate the growth rate of the company.She then uses the Gordon growth model to find the value of company’s stock. Given that the required rate of return is 12%, company’s ROE in 2013 is 14% and the earnings retention rate is 38%, the stock’s intrinsic value is closest to:
Explanation : The firm’s fundamental leading P/E Ratio is given by: Expected dividend
payout ratio Required rate - growth rate of dividends Expected dividend
payout ratio may be calculated by: 1– retention ratio. Therefore, the only
bit of information needed for computation is expected constant growth
rate of dividends.