Final answer:
The intrinsic value of Todd Mountain Development Corporation stock is $50.
Step-by-step explanation:
To calculate the intrinsic value of a stock using the constant-growth DDM (Dividend Discount Model), we can use the formula:
Intrinsic Value = D1 / (r - g)
Where:
- D1 is the expected dividend in the upcoming year
- r is the required rate of return on the stock
- g is the expected growth rate of dividends
In this case, Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year, with a growth rate of 7% per year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 19%. Todd Mountain Development Corporation has a beta of 0.60.
First, we need to calculate the required rate of return using the capital asset pricing model (CAPM):
r = RF + β * (RM - RF)
Where:
- RF is the risk-free rate of return
- β is the beta of the stock
- RM is the expected return on the market portfolio
Plugging in the values, we get: r = 4% + 0.60 * (19% - 4%) = 4% + 0.60 * 15% = 13%
Now, we can calculate the intrinsic value:
Intrinsic Value = $3 / (0.13 - 0.07) = $3 / 0.06 = $50
Therefore, the intrinsic value of the stock is $50.