Intrinsic Value Calculations by bet19912

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									                               INTRINSIC VALUE (using Value Line's estimates)
              Company Name:                  ABC Corp.
              Market Information                           Current and Forecasted Information
Risk-free Rate (Rf)                2.0%       Earnings Per Share (last yr.)                 $3.01
Expected Market Return (Retmkt)    6.0%       Earnings Per Share in 4 years                 $3.80
               Stock Information              Dividends Per Share (last yr.)                $1.20
Beta                               1.25       Dividends Per Share in 4 years                $1.76
Current Stock Price              $52.00       Company's P/E Ratio in 4 years                18.00

                                           Capital Asset Pricing Model
                                Required Rate of Return = Rf + Beta * ( Retmkt - Rf )
                                Required Rate of Return = 2.0% + 1.25 * ( 6.0% - 2.0% )
                                Required Rate of Return = 7.00%

                                      Growth Rate of Earnings and Dividends
Earnings growth = ($3.80/$3.01)^0.25 - 1 or 6.0%           Dividend growth = ($1.76/$1.20)^0.25 - 1 or 10.0%
                            Earnings and Dividend Projections (4-year forecast period)
E(0) =$3.01                                                 D(0) =$1.20
E(1) = $3.01 * (1 + 0.060) = $3.19                          D(1) = $1.20 * (1 + 0.100) = $1.32
E(2) = $3.19 * (1 + 0.060) = $3.38                          D(2) = $1.32 * (1 + 0.100) = $1.45
E(3) = $3.38 * (1 + 0.060) = $3.58                          D(3) = $1.45 * (1 + 0.100) = $1.60
E(4) = $3.58 * (1 + 0.060) = $3.80                          D(4) = $1.60 * (1 + 0.100) = $1.76

                                   Intrinsic Value (or Fair Price) Calculations
                             @ 7.0%
                                    Year                 C.F.                PVF                           NPV
Current Price = $52.00                                (52.00)
                                      (1)              $1.32         x     0.935         =               $1.23
                                      (2)               1.45         x     0.873         =                1.27
                                      (3)               1.60         x     0.816         =                1.31
                                      (4)               1.76         x     0.763         =                1.34
                                      (4)            $68.40          x     0.763         =               52.19
                                                                       Fair Price        =              $57.34



                                                        $68.40      =         18.00    x                $3.80
                                                        Price(4)    =           P/E(4)   x            E(4)

The fair price of the stock today is $57.34. At a current price of $52.00, you should buy the stock.
You should be willing to pay $52.00 for a stock that is worth $57.34. The expected rate of return on the stock is 9.7%.
                                                Security Market Line


             25.0%



             20.0%                                               20.2%
Return (%)




             15.0%                                                                              14.6%



             10.0%                                           9.7%
                                   9.0%


             5.0%



             0.0%
                     0.00   0.50               1.00                 1.50                 2.00           2.50
                                                          Beta

                                          Security Market Line             Expected Returns
2.50   3.00

								
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