Burnham & Company's $75 par value preferred stock pays an annual dividend of $11. The stock has a beta of 0.85, the current T-bill rate is 2.4%, and the S&P 500's expected return is 11.3%. Assuming that CAPM holds, what is the intrinsic value of this preferred stock?

Question

Business

Rachael Contreras

14 December, 00:07

Burnham & Company's $75 par value preferred stock pays an annual dividend of $11. The stock has a beta of 0.85, the current T-bill rate is 2.4%, and the S&P 500's expected return is 11.3%. Assuming that CAPM holds, what is the intrinsic value of this preferred stock?

+5

Answers (1)

Know the Answer?

Andrews · Answer 1

= $110.39

Explanation:

First, use CAPM formula to find the return of the stock;

CAPM; r = risk free + beta (market return - risk free)

r = 2.4% + 0.85 (11.3% - 2.4%)

r = 2.4% + 7.565%

r = 9.965%

Intrinsic value = D1 / r

D1 is next year's dividend = $11

= 11 / 0.09965

= 110.386

Therefore, if CAPM holds, the intrinsic value is $110.39