Question

Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 4% per year. The risk-free rate is 4%, and the expected return on the market portfolio is 12%. The stock has a beta of 0.75. What is the intrinsic value of the stock

Answer 1

$66.67

Step-by-step explanation:

according to the constant dividend growth model

price = d1 / (r - g)

d1 = next dividend to be paid

r = cost of equity

g = growth rate

According to the capital asset price model: Expected rate of return = risk free + beta x (market rate of return - risk free rate of return)

required return = 4% + 0.75 ( 12% - 4%) 10%

4/ 0.1 - 0.04 = $66.67