Question

Miltmar Corporation will pay a year-end dividend of $4, 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 12%. The stock has a beta of 0.75.

a.Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Market capitalization rate%

b.What is the intrinsic value of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Answer 1

Answer:

A. Market Capitalization rate = 13%

B. Intrinsic Value = $46.22

Explanation:

A. Market Capitalization rate:

CAPM should be used to calculate market capitalization from the given data. Following is the formula for CAPM

$CAPM=r+(MxB)$

r = risk free rate

M = market portfolio return

B = beta

Solution:

$CAPM=0.04+(0.75x0.12)$

CAPM = 13%

B. Intrinsic Value of stock

Gordon Growth Model (GGM) should be used to calculate intrinsic value of stock based on the given data.

Following is the formula for GGM

$GGM=Dx(1+g)/(r-g)$

D = Current Dividend

g = Dividend Growth rate

r = market capitalization rate (CAPM calculated in part A)

Solution:

$DDM=4x(1+0.04)/(0.13-.04)$

DDM = $46.22

Note: All values are rounded off to two decimal points.