Westsyde Tool Company is expected to pay a dividend of $2.00 in the upcoming year.The risk-free rate of return is 6% and the expected return on the market portfolio is 12%.Analysts expect the price of Westsyde Tool Company shares to be $29 a year from now.The beta of Westsyde Tool Company's stock is 1.20.Using a one-period valuation model,the intrinsic value of Westsyde Tool Company stock today is _________.

Question

Quizplus · Accepted Answer

The formula for one-period valuation model is:
V0 = D1/(1+r) + P1/(1+r)
Where,
V0 = Intrinsic value of the stock today
D1 = Expected dividend next year = $2.00
r = Required rate of return = Risk-free rate of return + Beta*(Market return - Risk-free rate of return) = 6% + 1.20*(12% - 6%) = 13.2%
P1 = Expected price of the stock next year = $29

Putting the values in the formula:
V0 = 2.00/(1+0.132) + 29/(1+0.132) = $27.39

Therefore, the intrinsic value of Westsyde Tool Company stock today is $27.39.

Westsyde Tool Company Is Expected to Pay a Dividend of $2.00