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cricket20 [7]
3 years ago
5

LA Diversified Inc. recently paid its annual dividend of $3. Dividends have consistently grown at a rate of 3.8%. The stock has

a beta of 0.88. The current risk-free rate is 2.4% and the market return is 10.9%. Assuming that CAPM holds, what is the intrinsic value of this stock?
Business
1 answer:
RSB [31]3 years ago
3 0

Answer:

$51.22

Explanation:

For computing the intrinsic value, first we have to determine the current year dividend and expected rate of return which is shown below:

The computation of the next year dividend is shown below:

= $3 + $3 × 3.8%

= $3 + 0.114

= $3.114

And, the expected rate of return would be

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

= 2.4% + 0.88 × (10.9% - 2.4%)

= 2.4% + 0.88 × 8.5%

= 2.4% + 7.48%

= 9.88%

Now the intrinsic value would be

= Next year dividend ÷ (Required rate of return - growth rate)

= $3.114 ÷ (9.88% - 3.8%)

= $3.114 ÷ 6.08%

= $51.22

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