The Compreses Corp has just paid a dividend of $0.5 per share. Dividends are expected to grow indefinitely at a constant rate of 6% per year. The risk-free rate is 4%, and the expected return on the market portfolio is 12%. The stock has a beta of .75. What is the intrinsic value of Compreses Corp?
Last Dividend, D0 = $0.50
Growth Rate, g = 6.00%
Required Return, r = Risk-free Rate + Beta * (Market Return -
Risk-free Rate)
Required Return, r = 4.00% + 0.75 * (12.00% - 4.00%)
Required Return, r = 10.00%
D1 = D0 * (1 + g)
D1 = $0.50 * 1.06
D1 = $0.53
P0 = D1 / (r - g)
P0 = $0.53 / (0.10 - 0.06)
P0 = $0.53 / 0.04
P0 = $13.25
So, intrinsic value of Compreses Corp. is $13.25
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