Question

Miltmar Corporation will pay a year-end dividend of $5, 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 11%. The stock has a beta of 0.70.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:

(a) 8.90%

(b) $102.04

Explanation:

(a) Market capitalization rate i.e. expected return:

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

= 4% + 0.70 (11% - 4%)

= 8.90%

Therefore, the market capitalization rate is 8.90%.

(b) Intrinsic value of stock:

= Expected dividend ÷ (Required return - Growth rate)

= $5 ÷ (8.90% - 4%)

= $102.04

Therefore, the intrinsic value of the stock is $102.04.