Question

Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of 0.5. Using the constant-growth DDM, the intrinsic value of the stock is _________.

Answer 1

Answer:

$50

Explanation:

For computing the intrinsic value, first we have to determine the expected rate of return which is shown below:

Expected rate of return = Risk-free rate of return + Beta × (Market rate of return - Risk-free rate of return)

= 5% + 0.5 × (13% - 5%)

= 5% + 0.5 × 8%

= 5% + 4%

= 9%

Now the intrinsic value of the stock is

= Current year dividend ÷ (Required rate of return - growth rate)

= $6 ÷ (9% + 3%)

= $50