Question

Sure Tool Company 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 Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. What is the intrinsic value of Sure's stock today?

a. $22.00
b. $12.12
c. $20.60
d. $20.00

Answer 1

c. $20.60

Step-by-step explanation:

Required return = Risk free rate + Beta*(Market rate-Risk free rate)

= 4 + 1.25*(14-4)

= 4 + 1.25*10

= 4 + 12.5

= 16.5%

Intrinsic value = Future dividend and value*Present value of discounting factor(rate%,time period)

= 2/1.165 + 22/1.165

= 1.7167 + 18.8841

= 20.6008

= $20.6

So, the intrinsic value of Sure's stock today is $20.60.