Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5% and the expected return on the market portfolio is 13%. The shares of Caribou Gold Mining Corporation have a beta of -0.50. Using the constant growth DDM, the intrinsic value of the shares is ________.

Question

Quizplus · Accepted Answer

The intrinsic value using the constant growth DDM is calculated as D1 / (r - g). Here, D1 = $6, r = risk-free rate + beta * (market return - risk-free rate) = 5% - 0.5 * (13% - 5%) = 1%, and g = -3%. The intrinsic value is $6 / (0.01 + 0.03) = $6 / 0.04 = $150.

Caribou Gold Mining Corporation Is Expected to Pay a Dividend