Question

Dove Ltd pays 40% of its earning in dividends and its latest earnings announced were R10 per share. The company expects to earn a return on equity of 20% per year in all reinvested earning forever. Dove's beta coefficient is 1.2, the risk free is 8% and the expected return on the market portfolio is 15%. If the market share price is R100 and you expect the market price to be equal to the intrinsic value, what is your expected one year holding period

Answer 1

The expected one year holding period return is 18.52%

What is growth rate of the company's earnings?

The growth rate of the company's earnings is determined as the retention rate(1-dividend payout ratio) multiplied by the return on equity

growth rate=(1-40%)*20%

growth rate=12.00%

The return on the company's stock can be determined using the Capital Asset Pricing Model as shown below:

expected return=risk-free rate+(market return-risk-free rate)*beta

expected return=8%+(15%-8%)*1.2

expected return=16.40%

holding period=(price in one year-price now+ dividend in one year)/price now

price now=100

price in one year=dividend in year 2/(expected return-growth rate)

earnings now=10

dividend now in 1 year=10*(1+12%)*40%=4.48

earnings in 2 years=10*(1+12.00%)^2

earnings in 2 years=12.544

dividend in 2 years=12.544*40%= 5.0176

price in one year=5.0176/(16.40%-12.00%)

price in one year= 114.04

expected one year holding period return=(114.04-100+4.48)/100

expected one year holding period return=18.52%

Find out more about holding period return on:https://brainly.com/question/16390191

#SPJ1