Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter
ID: 2758892 • Letter: M
Question
Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter are expected to grow at the constant rate of 6% per year. The risk-free rate is 6%, and the expected return on the market portfolio is 12%. The stock has a beta of 0.78.
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 $5, and dividends thereafter are expected to grow at the constant rate of 6% per year. The risk-free rate is 6%, and the expected return on the market portfolio is 12%. The stock has a beta of 0.78.
Explanation / Answer
a. Market Capitalization rate as per CAPM is given by
Re = Rf + beta*(Rm - Rf)
Rf = 6%, beta = 0.78 and Rm =12%
So Market Capitalization = 6 + 0.78*(12-6) = 10.68%
b. According to DDM Instrinc value of the stock = D1/(Ke - g)
D1 = next dividend = 5
Ke = 10.68% =0.1068
g = 6% = 0.06
Intrinsic Value = 5/(0.1068-0.06) = 106.837 = $106.84
Instrinsic value = $106.84