Dominion 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 Dominion Tool Company shares to be $22 a year from now.The beta of Dominion Tool Company's stock is 1.25.What is the intrinsic value of Dominion's stock today?

Question

Quizplus · Accepted Answer

The intrinsic value is calculated using the dividend discount model: Intrinsic Value = (Dividend + Expected Price) / (1 + Required Rate of Return). The required rate of return is calculated using CAPM: Required Rate = Risk-free Rate + Beta * (Market Return - Risk-free Rate) = 4% + 1.25 * (14% - 4%) = 16.5%. Intrinsic Value = ($2 + $22) / (1 + 0.165) = $20.60.

Dominion Tool Company Is Expected to Pay a Dividend of $2