Miltmar Corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 5% per year. The risk-free rate is 3%, and the expected return on the market portfolio is 10%. The stock has a beta of 0.60.

a. Calculate the market capitalization rate.

b. What is the intrinsic value of the stock?

a. 3.042%

b. $204.29

Explanation:

a. The computation of the market capitalization rate is here below:-

Market capitalization rate = Risk free rate + Beta * (Market rate - Risk free rate)

= 3% + 0.60 * (10% - 3%)

= 3% + 0.60 * 7%

= 3% + 0.042

= 3.042%

b. The computation of the intrinsic value of the stock is here below:-

Intrinsic value = Expected dividend : (Required return - Growth rate)

= $4 : (3.042% - 5%)

= $4 : 0.01958

= $204.29