Miltmar corporation will pay a year-end dividend of $4, and dividends thereafter are expected to grow at the constant rate of 4% per year. the risk-free rate is 4%, and the expected return on the market portfolio is 12%. the stock has a beta of 0.75.

a.calculate the market capitalization rate. (do not round intermediate calculations. round your answer to 2 decimal places.)

market capitalization rate%

b.what is the intrinsic value of the stock? (do not round intermediate calculations. round your answer to 2 decimal places.)

A. Market Capitalization rate = 13%

B. Intrinsic Value = $46.22

Explanation:

A. Market Capitalization rate:

CAPM should be used to calculate market capitalization from the given data. Following is the formula for CAPM

r = risk free rate

M = market portfolio return

B = beta

Solution:

CAPM = 13%

B. Intrinsic Value of stock

Gordon Growth Model (GGM) should be used to calculate intrinsic value of stock based on the given data.

Following is the formula for GGM

D = Current Dividend

g = Dividend Growth rate

r = market capitalization rate (CAPM calculated in part A)

Solution:

DDM = $46.22

Note: All values are rounded off to two decimal points.

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