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Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year....

Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 10% per year. The risk-free rate of return is 8%, and the expected return on the market portfolio is 18%. The stock of Todd Mountain Development Corporation has a beta of 0.60. Using the constant-growth DDM, the intrinsic value of the stock is _________.

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Answer #1

According to Capital Asset Pricing Model Required Return on the stock = Risk Free Rate + (Expected Market Retrun -Risk Free Rate) X Beta of the Stock

Given,

Risk Free Rate = 8%

Expected Market Return = 18%

Beta of the Stock = 0.60

Therefore Required Rate of Return of the Stock (Re) = 8% + (18% - 8%) x 0.60 = 14%

We have the forumla for intrinsic value of Share price = D1/(Re-G)

Where D1 = Dividend for the next year

G =Constant Growth rate

Therefore  intrinsic value of Share price = $ 3/ (0.14-0.10)

Answer intrinsic value of Stock $ 75   

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