Miltmar Corporation will pay a year-end dividend of $3, and dividends thereafter
ID: 2712163 • Letter: M
Question
Miltmar Corporation will pay a year-end dividend of $3, and dividends thereafter are expected to grow at the constant rate of 4% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 14%. The stock has a beta of 0.82.
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 $
Explanation / Answer
Expected return on stock = Rf + [beta(rm -rf)]
= 5+ [.82 (14 -5)]
= 5 +[.82 * 9]
= 5+ 7.38
= 12.38%
b)Intrinsic value = D1 /(Rs -g)
= 3 /(.1238 - .04)
= 3 / .0838
=$ 35.80 per share