An investor gathers the following data to estimate the intrinsic value of a company's stock using the justified forward P/E approach.
| Next year's earnings per share | $3.00 |
| Return on equity | 12.5% |
| Dividend payout ratio | 60% |
| Required return on shares | 10% |
The intrinsic value per share is closest to:
A is correct. Given that the intrinsic value: P0 = P0 /E1 × E1
Justified forward P/E: P0 /E1 = p/(r - g);
Where: p = payout ratio
Dividend growth rate = (1 - Payout ratio) × ROE = (1-0.6) × 12.5 = 5%;
Justified forward P/E: P0/E1: 0.60/(0.10 - 0.05) = 12 × Intrinsic value = 12 × $3 = $36.