Question

Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of 0.5. Using the constant-growth DDM, the intrinsic value of the stock is ________.A) $50B) $100C) $150D) $200

Answer 1

Answer:

A) $50

Explanation:

The computation of the intrinsic value of the stock is shown below:

But before that the required rate of return is computed by using CAPM

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

= 5% + 0.5 × (13% - 5%)

= 5% + 0.5 × 8%

= 5% + 4%

= 9%

Now the intrisinc value is

= Dividend ÷ (required rate of return - growth rate)

= $6 ÷ (9% - (-3%)

= $6 ÷ 12%

= $50

Hence, the intrinsic value of the stock is $50

Therefore the correct option is A.