Based on the information provided, calculate the intrinsic value in 2010 of a share of INV Corp. using the Present Value of Earnings Model (infinite holding period). For 2010 net income was $250,000, total debt was $50,000, and there were 206,263 shares outstanding. The required rate of return is 12 percent, and the estimated growth rate in earnings is 5.5 percent.
A) $19.43
B) $23.98
C) $28.52
D) $22.73
E) $15.50

Question

Quizplus · Accepted Answer

The correct answer is A because the intrinsic value of a share of INV Corp. using the Present Value of Earnings Model (infinite holding period) is $19.43. This is calculated as follows:Intrinsic value = Present value of future earnings / Number of shares outstandingPresent value of future earnings = Net income / (Required rate of return - Estimated growth rate)Present value of future earnings = $250,000 / (0.12 - 0.055)Present value of future earnings = $250,000 / 0.065Present value of future earnings = $3,846,153.85Intrinsic value = $3,846,153.85 / 206,263Intrinsic value = $19.43

Based on the Information Provided, Calculate the Intrinsic Value in 2010