Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter
ID: 2772367 • 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 3%, and the expected return on the market portfolio is 10%. The stock has a beta of 0.60.
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.)
a.Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
a. Market capitalization rate, K = risk free rate + beta * retrun of market protfolio - risk free rate)
= 3% + 0.60 * (10% - 3%)
= 7.2%
b. Intrinsic vale of stock = Dividend / (Market capitalizatio rate - Dividend growth rate)
= $4 / (7.2% - 5%)
= $181.82