Question

Sunshine Corporation is expected to pay a dividend of $1.50 in the upcoming year. Dividends are expected to grow at the rate of 6% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Sunshine Corporation has a beta of 0.75. The intrinsic value of the stock is

Answer 1

7.82

Step-by-step explanation:

because the percentage is too low

Answer 2

$25

Step-by-step explanation:

The computation of the intrinsic value of the stock is shown below:

As we know that

Intrinsic value or Price = Dividend ÷ (Cost of equity - growth rate)

where,

Cost of equity or ke is

= Risk free rate of return + beta × (Market rate of return - risk free rate of return)

= 6% + 0.75 × (14% - 6%)

= 12 %

So the intrinsic value is

= $1.50 ÷ (12% - 6%)

= $25