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 shares is 1.20. Using a one-period valuation model, the intrinsic value of Westsyde Tool Company shares today is ________.

Question

Quizplus · Accepted Answer

According to the one-period valuation model, the intrinsic value of a stock is calculated as follows:

Intrinsic value = (Expected dividend / (1 + required rate of return)) + (Expected price - Current price) / (1 + required rate of return)

Plugging in the given values: 
- Expected dividend = $2.00 
- Required rate of return = risk-free rate + beta*(expected market return - risk-free rate) = 6% + 1.20*(12% - 6%) = 12.6% 
- Expected price = $29 
- Current price = unknown

Intrinsic value = ($2.00 / (1 + 0.126)) + ($29 - Current price) / (1 + 0.126)

To solve for the current price, we can rearrange the equation:

Current price = $29 - ($2.00 / (1 + 0.126)) * (1 + 0.126)

Current price = $27.39

Therefore, the intrinsic value of Westsyde Tool Company shares today is $27.39. Choice B is the correct answer.

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