Question

Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of 0.75. Using the constant-growth DDM, the intrinsic value of the stock is _________.

Answer 1

Intrinsic value of the stock = $50

Step-by-step explanation:

Dividend paid in the upcoming year, D = $3

Dividends are expected to grow at the rate, g = 8% per year

Risk-free rate of return, Rf = 5%

Expected return on the market portfolio, Rm = 17%

Beta = 0.75

Intrinsic value of the stock, Po = ?

Calculating Cost of Equity (Ke)-

Ke = Rf + Beta (Rm - Rf)

Ke = .05 + 0.75 (0.17 - 0.05)

Ke = 0.05 + 0.09

= 0.14

Ke = 14%

Calculating Intrinsic value of stock (P0)

`Po=(D)/(k-g)`

​
`Po=(3)/(0.14-0.08)`

Po = $50