Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter
ID: 2723190 • Letter: M
Question
Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 3% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 14%. The stock has a beta of 0.65.
Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
What is the intrinsic value of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 3% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 14%. The stock has a beta of 0.65.
Explanation / Answer
Use CAPM to determine the required rate of return:
E(r) = RFR + ß(Rmkt - RFR)
E(r) = 5 + 0.65(14 - 5)
= 10.85
The Market capitlisation rate is 10.85%
Use Gordon growth model to determine price (at time = 0):
P0 = D1 / (r - g),
P0 = 5 / (0.1085 - 0.03)
P0 = 5 / 0.0785
P0 = $63.694
The D1 could be next years' dividend: $5(1 + g)
= $5(1.03) = 5.15
P0 = 5.15/0.03 = $171.67