Question

Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Old Quartz Gold Mining Company has a beta of -0.25. The intrinsic value of the stock is

Answer 1

$133.33

Step-by-step explanation:

Cost of equity (Ke) = Rf + beta*(Rm-Rf)

Cost of equity (Ke) = 6% - 0.25*(14%-6%)

Cost of equity (Ke) = 4%

Cost of equity (Ke) = 0.04

According to the dividend distribution model Ke = D1/ P0 + g. P0 = D1/(ke-g, where D1 = 8, g = -0.02 and Ke = 0.04

P0 (Intrinsic price) = 8/(0.04+0.02)

P0 (Intrinsic price) = 8/0.06

P0 (Intrinsic price) = $133.33

Therefore, he intrinsic value of the stock is $133.33.