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

Answer:

Captilaziation rate 8.80%

Intrinsic value of the stock $ 189.29

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:

$\frac{D_1}{r-g} = PV\\\frac{D_0(1+g)}{r-g} = PV$

$\frac{5(1+0.06)}{0.088-0.06} = PV$

PV 189,2857