Sure 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 Sure Tool Company shares to be $22 a year from now. The beta of Sure Tool Company's stock is 1.25.
-What is the intrinsic value of Sure's stock today?
A)$20.60
B)$20.00
C)$12.12
D)$22.00
E)none of the above

Question

Quizplus · Accepted Answer

Using the dividend discount model, we can calculate the intrinsic value of Sure Tool Company's stock today:

Expected dividend = $2
Discount rate (required rate of return) = risk-free rate + beta x (expected market return - risk-free rate) = 4% + 1.25 x (14% - 4%) = 4% + 12.5% = 16.5%
Expected stock price in one year = $22

Intrinsic value = (Expected dividend + Expected stock price in one year) / (1 + Discount rate) = ($2 + $22) / (1 + 16.5%) = $20.60. Therefore, the intrinsic value of Sure Tool Company's stock today is $20.60.

The best choice is A.

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