Question

Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 4% per year. 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 the stock?

Short answer

Answer

$66.67

Step-by-step solution

Given information

r_f= 4%

β= .75

E(r_m) = 12%

Calculation of market capitalization rate

k = r_f +β[E(r_m) - r_f]

= 0.04 + 0.75(0.12 – 0.04)

= 0.10

Calculation of intrinsic value

V₀= D₁/ k – g

= $4 / 0.10 – 0.04

= $66.67