Question

Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year....

Todd Mountain Development Corporation is expected to pay a dividend of $2.50 in the upcoming year. Dividends are expected to grow at the rate of 7% per year. The risk-free rate of return is 3% and the expected return on the market portfolio is 12%. The stock of Todd Mountain Development Corporation has a beta of 1.5. Using the constant growth DDM, the intrinsic value of the stock is _________.

Business   Finance   
0 0
Add a commentTranscribed image text
Next >

Homework Answers

Answer #1

Step-1, Calculation of the Required Rate of Return (Ke)

As per Capital Asset Pricing Model [CAPM], the Required Rate of Return is computed by using the following equation

Required Rate of Return = Risk-free Rate + Beta[Market Rate of Return - Risk-free Rate]

= 3.00% + 0.5[12.00% - 3.00%]

= 3.00% + [1.5 x 9.00%]

= 3.00% + 13.50%

= 16.50%

Step-2, Intrinsic value of the stock using the Constant Growth DDM

Intrinsic Value of the Stock = Dividend in Year 1 / (Required Rate of Return – Growth Rate)

= D1 / (Ke – g)

= $2.50 / (0.1650 – 0.07)

= $2.50 / 0.0950

= $26.32 per share

“Therefore, the Intrinsic value of the stock will be $26.32”

0 0
Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Log In

Sign Up

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
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 _________.
Low Cost Airline is expected to pay a dividend of $2 in the upcoming year. The...
Low Cost Airline is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4% and the expected return on the market portfolio is 14%. Analysts expect the price of Low Cost Airline shares to be $22 a year from now. The beta of the company's stock is 1.25. Based on the above information answer questions The market's required rate of return on Low Cost’s stock? What is the intrinsic value of Low...
(a) What is the value of a stock expected to pay a constant $3.50 dividend each...
(a) What is the value of a stock expected to pay a constant $3.50 dividend each year forever if the market required rate of return is 18%? (b) What is the estimated value of a stock, which intends to pay the dividend of $2.50 five years from now (at the end of year 5), expects dividends to grow at 10 percent? The Beta of this stock is 1.5. The yield on a 10-year government bonds is 3% the long-term return...
ABC Corporation expects to pay a dividend of $2 per share next year, and the dividend...
ABC Corporation expects to pay a dividend of $2 per share next year, and the dividend payout ratio is 80 percent. Dividends are expected to grow at a constant rate of 8 percent forever.Suppose the company's equity beta is 1.21, the market risk premius is 9%, and the risk free rate is 5%. Calculate the present value of growth opportunities.
ABC Corporation expects to pay a dividend of $2 per share next year, and the dividend...
ABC Corporation expects to pay a dividend of $2 per share next year, and the dividend payout ratio is 80 percent. Dividends are expected to grow at a constant rate of 8 percent forever.Suppose the company's equity beta is 1.21, the market risk premius is 9%, and the risk free rate is 5%. Calculate the present value of growth opportunities.
Grominet is expected to pay an annual dividend of $2.8 one year from now. Analysts also...
Grominet is expected to pay an annual dividend of $2.8 one year from now. Analysts also expect this dividend to grow at 10% per year thereafter until the fifth year. After then, growth has not been forecasted by analysts, but it is expected to be lower. Assume that the risk free rate of return is 3%, that the beta of Grominet is 1.5 and the market risk premium is 5%. What is the expected growth rate after year 5 implied...
Schnus Corporation just paid a dividend of $5.75 per share, and that dividend is expected to...
Schnus Corporation just paid a dividend of $5.75 per share, and that dividend is expected to grow at 20 percent each year for the next two years, and at constant rate of 8.50% per year thereafter. The company’s beta is 1.50, the required return on the market is 12.50%, and the risk-free rate is 2.40%. Calculate the company’s intrinsic value. thankyou !
A business is expected to pay a dividend of $1.50 per share at the end of...
A business is expected to pay a dividend of $1.50 per share at the end of the year, and that dividend is expected to grow at a constant rate of 5% per year in the future. The company's beta is 1.50, the market return is 15%, and the risk-free rate is 1.50%. What is the current stock price?
Peratti Industries recently paid a $2.50 dividend per share. The dividend of the company is expected...
Peratti Industries recently paid a $2.50 dividend per share. The dividend of the company is expected to grow by 30 percent next year, 25 percent the following year, and 20 percent the year after before growing at constant rate of 6 percent growth that continue forever. Peratti Industries’ beta is 0.7619, the risk-free rate of interest is 1.6 percent, and the rate of return on market is 10 percent. what is the current stock price of Peratti Industries? What was...
() The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively....
() The risk-free rate and the expected market rate of return are 0.056 and 0.125, respectively. According to the capital asset pricing model (CAPM), what is the expected rate of return on a security with a beta of 1.25?     (s) Consider the CAPM. The risk-free rate is 5%, and the expected return on the market is 15%. What is the beta on a stock with an expected return of 17%? (A coupon bond pays annual interest, has a par value...
ADVERTISEMENT
Need Online Homework Help?

Get Answers For Free
Most questions answered within 1 hours.

Ask a Question
ADVERTISEMENT