20. Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the co
ID: 2764988 • Letter: 2
Question
20.
Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6% and the expected return on the market portfolio is 14%. The stock of Old Quartz Gold Mining Company has a beta of -0.25. The intrinsic value of the stock is ______.
Question 20 options:
$80.00
133.33
$200.00
$400.00
none of the above
19.
You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while Stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X ______.
Question 19 options:
cannot be calculated without knowing the market rate of return
will be greater than the intrinsic value of stock Y
will be the same as the intrinsic value of stock Y
will be less than the intrinsic value of stock Y
none of the above is a correct answer.
$80.00
133.33
$200.00
$400.00
none of the above
19.
You wish to earn a return of 13% on each of two stocks, X and Y. Stock X is expected to pay a dividend of $3 in the upcoming year while Stock Y is expected to pay a dividend of $4 in the upcoming year. The expected growth rate of dividends for both stocks is 7%. The intrinsic value of stock X ______.
Question 19 options:
cannot be calculated without knowing the market rate of return
will be greater than the intrinsic value of stock Y
will be the same as the intrinsic value of stock Y
will be less than the intrinsic value of stock Y
none of the above is a correct answer.
Explanation / Answer
20. The Cost of equity is given by by CAPM is Ke = Rf + beta*(Rm-Rf) = 16 - 0.25*(14-6) = 4% =0.04
According to the dividend distribution model, DDM, Ke = D1/ P0 + g
and P0 = D1/(ke-g)
D1 = 8, g = -0.02 and Ke = 0.04
Hence P0= Intrinsic price = 8/(0.04+0.02)=8/0.06 = 133.33
Answer is B:133.33
19.The intrinsic value of stock X will be less than the intrinsic value of stock Y. (OptionD)
Explanation: . P0 = d1/(ke-g) and since Ke and g are equal and X is having lower dividend, it price will be lower than Y
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