Question

. Confusion Corp is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Confusion Corp shares to be $22 a year from now. The beta of Confusion Corp's stock is 1.25. What is the intrinsic value of Confusion's stock today

Answer 1

$20.60

Step-by-step explanation:

Required Return of Stock = Risk free Rate + Beta*(Expected Return of market - Risk free Rate)

Required Return of Stock = 16.5% (4% + 1.25*(14% - 4%)), Expected Dividend in upcoming year(D1) = $2, Expected Price 1 years from now(P1) = $22

Intrinsic value of Confusion's stock today (P0):

P0 = (D1 + P) / (1 + Ke)^1

P0 = (2 + 22) (1 + 0.165)^1

P0 = 24 / 1.165

P0 = 20.60086

P0 = $20.60