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Mrrafil [7]
3 years ago
11

Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 4%

per year. The risk-free rate is 4%, and the expected return on the market portfolio is 12%. The stock has a beta of 0.75.
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.)
Business
1 answer:
____ [38]3 years ago
7 0

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

CAPM=r+(MxB)

r = risk free rate

M = market portfolio return

B = beta

Solution:

CAPM=0.04+(0.75x0.12)

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

GGM=Dx(1+g)/(r-g)

D = Current Dividend

g = Dividend Growth rate

r = market capitalization rate (CAPM calculated in part A)

Solution:

DDM=4x(1+0.04)/(0.13-.04)

DDM = $46.22

<em>Note: All values are rounded off to two decimal points.</em>

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