Question

The beta of a stock is 1.2. The risk free rate is 3%. The expected market return is 9%. The dividends of the company are expected to grow by 5.6% a year. The current dividend is $6.80. Using the Gordon growth model, what is the intrinsic value of the firm

Answer 1

Answer: $156.09

Step-by-step explanation:

First find the required return of the stock using CAPM:

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

= 3% + 1.2 * (9% - 3%)

= 10.2%

Find out the Next dividend to be paid:

= Current dividend * (1 + growth)

= 6.8 * (1 + 5.6%)

= $7.18

Gordon Growth Model:

= Next dividend / (Return on stock - growth rate)

= 7.18 / (10.2% - 5.6%)

= $156.09