Question

Mature Conglomerate Corporation (MCC) just paid a dividend of $1.49 per share, and that dividend is expected to grow at a constant rate of 6.00% per year in the future. The company's beta is 1.25, the required return on the market is 12.50%, and the risk-free rate is 4.00%. What is the intrinsic value for MCC’s stock? Enter your answer rounded to two decimal places. Do not enter $ or comma in the answer box. For example, if your answer is $12,300.456 then enter as 12300.46 in the answer box.

Answer 1

The intrinsic value is computed as shown below:

= [ Dividend just paid (1 + growth rate) ] / (cost of equity - growth rate)

cost of equity is computed as shown below:

= risk free rate + beta x (return on market - risk free rate)

= 0.04 + 1.25 x (0.125 - 0.04)

= 14.625% or 0.14625

So, the intrinsic value will be computed as follows:

= [ $ 1.49 (1 + 0.06) ] / (0.14625 - 0.06)

= $ 1.5794 / 0.08625

= $ 18.31 Approximately

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