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21 December, 10:13

Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 5% per year. The risk-free rate is 3%, and the expected return on the market portfolio is 10%. The stock has a beta of 0.60.

a. Calculate the market capitalization rate.

b. What is the intrinsic value of the stock?

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  1. 21 December, 13:01
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    a. 3.042%

    b. $204.29

    Explanation:

    a. The computation of the market capitalization rate is here below:-

    Market capitalization rate = Risk free rate + Beta * (Market rate - Risk free rate)

    = 3% + 0.60 * (10% - 3%)

    = 3% + 0.60 * 7%

    = 3% + 0.042

    = 3.042%

    b. The computation of the intrinsic value of the stock is here below:-

    Intrinsic value = Expected dividend : (Required return - Growth rate)

    = $4 : (3.042% - 5%)

    = $4 : 0.01958

    = $204.29
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