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

Question

Quizplus · Accepted Answer

k = .04 + 1.25 (.14 .04); k = .165; .165 = (22 P + 2)/P; .165P = 24 - P; 1.165P = 24 ; P = 20.60.

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