Old Quartz Gold Mining Company is expected to pay a dividend of $8 in the coming year.Dividends are expected to decline at the rate of 2% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Old Quartz Gold Mining Company has a beta of -0.25.The intrinsic value of the stock is _____.

Question

Quizplus · Accepted Answer

To calculate the intrinsic value of the stock using the dividend discount model, we can use the following formula:

Intrinsic Value = Dividend / (Discount Rate - Dividend Growth Rate)

We are given that the dividend for the coming year is $8 and the rate of decline in dividends is 2%. Therefore, the dividend growth rate (g) is -2%.

The risk-free rate of return (Rf) is 6% and the expected return on the market portfolio (Rm) is 14%. The beta (β) of the stock is -0.25.

To calculate the discount rate (k), we can use the capital asset pricing model (CAPM):

k = Rf + β(Rm - Rf)

k = 6% + (-0.25)(14% - 6%)

k = 4%

Substituting the values into the formula, we get:

Intrinsic Value = $8 / (4% - (-2%)) = $133.33

Therefore, the intrinsic value of the stock is $133.33, which is closest to option B.

Old Quartz Gold Mining Company Is Expected to Pay a Dividend