Question

Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at a constant rate of 4%. The risk-free rate is 4% and the expected return on the market portfolio is 12%. The stock has a beta of .75. What is the intrinsic value of Miltmar

Answer 1

intrinsic value = 66.67

Step-by-step explanation:

given data

year-end dividend = $4

constant rate = 4%

risk-free rate = 4%

market portfolio = 12%

beta = 0.75

solution

first we use here capital Asset Pricing Model formula to get market capitalization that is

market capitalization = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return) ......................1

put here value and we get

market capitalization = 4% + 0.75 × (12% - 4%)

market capitalization = 0.1

market capitalization = 10%

now we get here intrinsic value that is express as

intrinsic value = Expected dividend ÷ (market capitalization - growth rate) ...............2

intrinsic value = $4 ÷ (10% - 4%)

intrinsic value = 66.67