Suppose that a companies stock is expected to pay a dividend of $0.75 at the end of the year and that the dividend is expected to grow at a rate of 7%. The company’s current beta is 1.9, the current risk-free rate is 2.5% and the market risk premium is 8%. What is the intrinsic value of this stock?
$4.24
$10.71
None of these
$7.50
$7.01
Required rate=risk free rate+Beta*market risk premium
=2.5+(8*1.9)
=17.7%
Intrinsic value=D1/(Required return-Growth rate)
=0.75/(0.177-0.07)
=$7.01(Approx).
Suppose that a companies stock is expected to pay a dividend of $0.75 at the end...
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