Question

Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter are expected to grow at the constant rate of 6% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 10%. The stock has a beta of 0.76.a. Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Market capitalization rate _____ %b. What is the intrinsic value of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Intrinsic value $

Answer 1

Captilaziation rate 8.80%

Intrinsic value of the stock $ 189.29

Step-by-step explanation:

First we solve for the cot of capital (required return) using CAPM

`Ke= r_f + \beta (r_m-r_f)`

risk free = 0.05

market rate = 0.1

premium market = (market rate - risk free) 0.05

beta(non diversifiable risk) = 0.76

`Ke= 0.05 + 0.76 (0.05)`

Ke 0.08800

Now, we solve the horizon value using the gordon model formula:

`(D_1)/(r-g) = PV\\(D_0(1+g))/(r-g) = PV\\`

`(5(1+0.06))/(0.088-0.06) = PV\\`

PV 189,2857