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riadik2000 [5.3K]
2 years ago
5

Assume the Atlas Corporation is expected to pay a $5 cash dividend next year. Dividends are expected to shrink at a rate of 3% p

er year. The expected return from the market portfolio is 13% and riskless interest rate is 6%. Use the constant-growth dividend discount model (DDM) to determine the intrinsic value of Atlas stock if the company has a beta of .5.
Business
1 answer:
Simora [160]2 years ago
3 0

Answer: $40

Explanation:

First find the required return using CAPM;

Required return = Riskfree rate + beta * (Market return - riskfree rate)

= 6% + 0.5 * (13% - 6%)

= 9.5%

Then use DDM to determine intrinsic value;

= Next dividend / (Required return - growth rate)

= 5 / (9.5% - (-3%))

= $40

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