Todd Mountain Development Corporation is expected to pay a dividend of $ 4.69 in
ID: 2806755 • Letter: T
Question
Todd Mountain Development Corporation is expected to pay a dividend of $ 4.69 in the upcoming year. Dividends are expected to grow at the rate of 2 percent per year. The risk-free rate of return is 2 percent, and the market risk premium is 9 percent. The stock of Todd Mountain Development Corporation has a beta of 1.4. Using the constant-growth Dividend Discount Model and CAPM to estimate the cost of equity, what is the intrinsic value of the stock?
3.Lifecycle Motorcycle Company is expected to pay a dividend in year 1 of $2, a dividend in year 2 of $3, and a dividend in year 3 of $4. After year 3, dividends are expected to grow at the rate of 4 percent per year. An appropriate required return for the stock is 11 percent. Using the multistage DDM, compute the intrinsic value of the stock.
Explanation / Answer
2.
Required rate of return for company is calculated below using CAPM model:
Required rate of return = 2% + (9% × 1.40)
= 2% + 12.60%
= 14.60%
Required rate of return is 14.60%.
Expected Dividend = $4.69
Constant growth rate = 2%.
Current Stock price = $4.69 / (14.60% - 2%)
= $4.69 / 12.60%
= $37.22
Current Stock price of company is $37.22