The question is incomplete. Here is the complete question.
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 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth DDM, the intrisic value of the stock is _________. A. 17.65 B. 50 C. 4 D. 37.50
Answer:
50
Explanation:
Todd mountain development corporation is expected to pay a dividend of $3
The dividend is expected to grow at the rate of 8%
= 8/100
= 0.08
The risk free rate of return is 5%
= 5/100
= 0.05
The expected return on the market portfolio is 17%
= 17/100
= 0.17
The beta is 0.75
The first step is to calculate the discount rate
K= 0.05+0.75(0.17-0.05)
= 0.05+0.75(0.12)
= 0.05+0.09
= 0.14
Therefore, using the constant growth DDM the intrinsic value can be calculated as follows
Vo= 3/0.14-0.08
Vo= 3/0.06
Vo= 50
Hence the intrinsic value of the stock is 50
