ABC company pays out 40% of its earnings in dividends, and the latest earnings announced were 0.8 USD per share. Dividends have just been paid and are expected to be paid annually. You expect that ABC will earn an ROE of 20% per year on all reinvested earnings forever. Assuming the risk-free rate is 6% per annum, the expected rate of return on the market portfolio is 16% per annum, and ABC has a beta coefficient of 1.1.

What is the intrinsic value of a share of ABC stock?

If the market price of an ABC share is currently 9 USD, and you expect the market price to be equal to the intrinsic value 1 year from now, what is your expected 1-year holding period return on ABC stock?

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