Suppose YUCK! (YUCK), the parent company of many fast food chains that compete with McDonalds, currently has a dividend payout ratio of 40%. Its beta is 0.75 and its current dividend per share is $1.44 per year. Suppose YUCK has a return on equity of 11% and the risk-free rate is 2% while the expected annual return on the S&P 500 is 10%.
(a) At what price do you expect a share of YUCK to sell for today?
(b) At what price do you expect YUCK to sell in three years?
(c) It turns out that YUCK currently sells for $105. If you expect that YUCK’s market price will equal its intrinsic value 1 year from now, what is your expected 1 year holding period return on YUCK stock? What does this imply about under/overpricing and alphas?