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31 March, 19:48

Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at a constant rate of 4%. The risk-free rate is 4% and the expected return on the market portfolio is 12%. The stock has a beta of. 75. What is the intrinsic value of Miltmar

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  1. 31 March, 20:16
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    intrinsic value = 66.67

    Explanation:

    given data

    year-end dividend = $4

    constant rate = 4%

    risk-free rate = 4%

    market portfolio = 12%

    beta = 0.75

    solution

    first we use here capital Asset Pricing Model formula to get market capitalization that is

    market capitalization = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return) ... 1

    put here value and we get

    market capitalization = 4% + 0.75 * (12% - 4%)

    market capitalization = 0.1

    market capitalization = 10%

    now we get here intrinsic value that is express as

    intrinsic value = Expected dividend : (market capitalization - growth rate) ... 2

    intrinsic value = $4 : (10% - 4%)

    intrinsic value = 66.67
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