Question

Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 8%, and the expected return on the market portfolio is 18%. The stock of Todd Mountain Development Corporation has a beta of 0.60. Using the constant-growth DDM, the intrinsic value of the stock is _________.

Answer 1

Answer:

$75

Explanation:

As per the data given in the question,

Ke = risk free rate of return + beta×(market portfolio - risk free rate of return)

= 8% + 0.60 × (18% - 8%)

= 8% + 6%

= 14%

= 0.14

Now using the constant-growth DDM model :

Intrinsic value of the stock = Dividend ÷ (Ke - expected growing rate)

= $3 ÷ (0.14-0.10)

= $75

Hence, Intrinsic value of the stock is $75.