INVESTMENT MGMT HELP: Miltmar Corporation will pay a year-end dividend of $5, an

Question

INVESTMENT MGMT HELP:

Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter are expected to grow at the constant rate of 5% per year. The risk-free rate is 5%, and the expected return on the market portfolio is 10%. The stock has a beta of 0.74. a. Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.) Market capitalization rate b. What is the intrinsic value of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.) Intrinsic value

Explanation / Answer

Market capitalization rate = Risk free rate + Beta ( Market Return - Risk Free rate)

= 5%+0.74(10%-5%) i.e 8.7%

Intrinsic value of the stock = D1/Ke-G

= 5/0.087-0.05 i.e 135.13

Price willing to pay = 4.50/4% i.e 112.50

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