Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter
ID: 2728429 • 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 5% per year. The risk-free rate is 6%, and the expected return on the market portfolio is 12%. The stock has a beta of 0.92.
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
a.
Market capitalisation rate = Rf + Beta(market return - Rf)
= 0.06 + 0.92 (0.12-0.06)
= 6.55%
b.
Intrinsic value of stock = Next year dividend/(ke-growth)
= $4 * 1.05/(0.0655 - 0.06)
= $763.64