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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?

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  1. 14 December, 02:39
    0
    = $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
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