An investor gathers the following data to estimate the intrinsic value of a company's stock using the justified forward price-to-earnings ratio (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:
Given that the Intrinsic value is P0 = P0 /E1 × E1 and
Justified forward P/E is 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, so
Intrinsic value = 12 × $3 = $36.