Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter
ID: 2777329 • 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 6% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 10%. The stock has a beta of 0.66.
A.) Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
B.) What is the intrinsic value of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
A)
Expected return = Rf+×Rp
Rf is risk free return
Rp is risk premium
= 5%+0.66×(10%-5%)
= 8.3%
B)
Intrinsic value of share:
Stock price = D1÷(r-g)
D1 is next expected dividend
r is cost of common stock
g is growth rate
= $4÷(8.3%-6%)
= $173.91