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As the Finance Manager of a firm you are looking at an investment for some of...

  1. As the Finance Manager of a firm you are looking at an investment for some of the firm’s excess capital in the Catskill Fusion Corporation (CFC) which sells for $65.75 per share and pays an annual dividend of $5.75. Dividends are expected to increase at 7.34% annually. The current risk-free rate is 4.19% and the market index is returning 12.17%. The beta of Catskill is 1.92. The questions are as follows:
  1. What should the investor’s required rate of return be in order to buy CFC?

  1. What is the intrinsic value of CFC stock?

  1. What is the expected rate of return on CFC stock?

  1. Does the expected rate of return for CFC beat the market index return?

  1. Does the expected rate of return for CFC meet the investor’s required rate of return?

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Answer #1

I have answered part b at the end

a. D1 = 5.75 * 1.0734 = $6.17205

c. The expected rate of return

d. Yes, the expected rate of return for CFC (19.5116%) beat the market index return (12.17%)

e. Yes, the expected rate of return for CFC (19.5116%) meet the investor's required rate of return (16.72714829%)

b. Intrinsic value

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