Miltmar Corporation will pay a year-end dividend of $3, and dividends thereafter
ID: 2756045 • 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 4%, and the expected return on the market portfolio is 14%. The stock has a beta of 0.90.
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 $3, and dividends thereafter are expected to grow at the constant rate of 4% per year. The risk-free rate is 4%, and the expected return on the market portfolio is 14%. The stock has a beta of 0.90.
Explanation / Answer
Market Capitalization rate= risk free rate+Beta(market return- risk free rate)
=4%+0.9(14%-4%)
Market Capitalization rate(r)=13%
Intrinsic value of a stock = Dividend next year/r-g
=3*(1+4%)/13%-4%
Intrinsic value of a stock =$34.67