intrinsic value per share & valuation of real estate

Please advise on two questions from mock exams -

  1. An investor gathers the following data to estimate the intrinsic value of a company’s stock using the justified forward P/E approach.

Nest year’s EPS: $3.00

Return on equity: 12.5%

Dividend payout ratio: 60%

Required returns on shares: 10%

The intrinsic value per share is close to:

A. $36

B. $48

C. $72

Answer: A. I sort of understand how they reached the choice A. Per DDM, the P is $12. $12 * next year’s EPS $3 = $36. However, I don’t understand what the equation (the intrinsic value per share = share price * EPS?) means… Can anyone please explain a little bit more about the concept “intrinsic value per share”?

  1. A real estate investment has the following characteristics:

Annual rental income: $1,800,000

Annual operating expenses: $1,200,000

Available mortgage rate: 6%

Financing percentage: 90%

Capitalization Rate: 15%

Estimated holding period: 5 years

Investor’s tax rate: 25%

Based on the income approach, the value of the investment is closest to:

A. $4,000,000

B. $5,455,000

C. $6,133,000

The answer is A. The solution is straightforward: using the income approach, (1,800,000 – 1,200,000)/0.15= $4,000,000

Based on my understanding, operating expense doesn’t include tax expenses. Operating income usually equals EBIT, and tax expense is a separate item which is listed under the operating income in the income statement. So here is my question: why didn’t we take the tax expense into consideration?

“the intrinsic value per share = share price * EPS”

This doesn’t make any sense: you’re multiplying dollars by dollars-per-share = dollars² per share.

Where did you see this formula?

I didn’t see the formula anywhere… I was just purely guessing, trying to figure out how to get the answer A $36…

Please help.


DPS1 = EPS1 × payout ratio = $3.00 × 0.60 = $1.80.

g = retention ratio × ROE = (1 – payout ratio) × ROE = 0.40 × 12.5% = 5%

V0 = DPS1 / (r – g) = $1.80 / (10% - 5%) = $36.

Don’t say sorry la~~ Thank you very much for your help all the time.

Any thoughts on Q2?

Hi, I know this is a old post, but where in the book in can find this formula “V0 = DPS1 / (r – g)”

Im in the exact same questions and I knew how to get to DPS1 and the g but I didnt knew about this intrinsic value formula, can you say where is it?