A company has 100 million shares outstanding trading for $8 per share. It also has $900 million in outstanding debt. If its equi
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Answer:
A. Market Capitalization rate = 13%
B. Intrinsic Value = $46.22
Explanation:
<em>A. Market Capitalization rate:</em>
CAPM should be used to calculate market capitalization from the given data. Following is the formula for CAPM
r = risk free rate
M = market portfolio return
B = beta
Solution:
CAPM = 13%
<em>B. Intrinsic Value of stock</em>
Gordon Growth Model (GGM) should be used to calculate intrinsic value of stock based on the given data.
Following is the formula for GGM
D = Current Dividend
g = Dividend Growth rate
r = market capitalization rate (CAPM calculated in part A)
Solution:
DDM = $46.22
<em>Note: All values are rounded off to two decimal points.</em>