Answer and Explanation:
The computation of each part is to be shown in the attachment. The one statement is of final values and the other one is of formula sheet.
This one applied for all the things which need to be find out
Kindly find the attachment below:
We use the RATE formula for determining the rate of return and the same is to be considered
Answer:
the intrinsic value of the stock is 42.97
If the stock is priced at 40 dollars it would be a good idea to purchase the share as will provide a better yield than the cost of capital of 9.6%
Explanation:
First, we solve for the cost of equity using the CAPM:
risk free = 0.03
market rate = 0.09
premium market = (market rate - risk free) = 0.055
beta(non diversifiable risk) = 1.2
Ke = 0.09600
<em>Now we solve for the intrinsic price using the gordon model</em>
<em>with multi-stage growth:</em>
First, we calcualte the future dividends
grow rate Dividends
0 1.25
1 0.25 1.5625
2 0.25 1.953125
3 0.25 2.44140625
4 0.25 3.051757813
4 0.03 3.143310547
Now in the last year, we calcualte using the gordon model or constant grow:
32.7128182
Now we calculate and add together the present value of each of this future cash flow to determnate the intrinsic value ofthe share:
Present Value
1 1.5625 / (1+0.096)^1 = 1.425638686
2 1.953125 / (1+0.096)^2 = 1.625956531
and so on, giving the following values:
3 1.854421226
4 2.114987712
present value of the future dividends at 3% 22.67126448
<u>Finally we add them and get:</u>
42.97160726