Low Fly Airline is expected to pay a dividend of $7 in the coming year.Dividends are expected to grow at the rate of 15% per year.The risk-free rate of return is 6% and the expected return on the market portfolio is 14%.The stock of Low Fly Airline has a beta of 3.00.The intrinsic value of the stock is ______.
A)$46.67
B)$50.00
C)$56.00
D)$62.50
E)none of the above

Question

Quizplus · Accepted Answer

The intrinsic value of the stock is $46.67. This is calculated using the Gordon Growth Model, which is:Intrinsic Value = Dividend / (Required Rate of Return - Growth Rate)In this case, the dividend is $7, the required rate of return is 14% (the expected return on the market portfolio), and the growth rate is 15%. Plugging these values into the formula, we get:Intrinsic Value = $7 / (0.14 - 0.15) = $46.67

Low Fly Airline Is Expected to Pay a Dividend of $7