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Sure Tool Company is expected to pay a dividend of $2 in the upcoming year. The risk-free rate of return is 4%, and the expected return on the market portfolio is 14%. Analysts expect the price of Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25. What is the intrinsic value of Shares stock today

Answer :

saqib097

Answer:

The intrinsic value of Sure Tool Company stock today is $20.60

Explanation:

We will find out the instrinsic value of the stock today by the required rate of return formula, but first we will calculate the required return on the stock using the CAPM model.

As per CAPM,

Required Rate of Return = Rf + Beta (Rm - Rf)

Rf = 4%

Rm = 14%

Beta = 1.25

Required rate of Return = 4% + 1.25(14% - 4%) = 16.5%

Intrinsic value of the stock:

Required Rate of Return = (Expected Price - P + Expected Dividend) / P                              [Where P is Intrinsic Value]

0 .165 = ($22 - P + 2) / P

0 .165P = $24 - P

1.165P = $24,

P = $24 / 1.165 = $20.60

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