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 .5. Using the constant-growth DDM, the value of the stock is _________. A. $150 B. $50 C. $100 D. $200

Answer 1

The question is incomplete. Here is the complete 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 .5. Using the constant-growth DDM, the intrinsic value of the stock is _________. A. $150 B. $50 C. $100 D. $200

Answer:

$50

Explanation:

Caribou Gold mining corporation is expected to make a dividend payment of $6 next year

Dividend are expected to decline at a rate of 3%

= 3/100

= 0.03

The risk free rate of return is 5%

= 5/100

= 0.05

The expected return on the market portfolio is 13%

= 13/100

= 0.13

The beta is 0.5

The first step is to calculate the expected rate of return

= 0.05+0.5(0.13-0.05)

= 0.05+0.5(0.08)

= 0.05+0.04

= 0.09

Therefore, the intrinsic value of the stock using the constant growth DDM model can be calculated as follows

Vo= 6/(0.09+0.03)

Vo= 6/0.12

Vo= $50

Hence the intrinsic value of the stock is $50