Please advise on two questions from mock exams -
- 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:
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”?
- 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:
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?