Question

Schnusenberg Corporation just paid a dividend of $1.95 per share, and that dividend is expected to grow at a constant rate of 7.00% per year in the future. The company's beta is 2.50, the required return on the market is 10.50%, and the risk-free rate is 3.00%. What is the intrinsic value for Schnusenberg’s stock?

Answer 1

As per CAPM

expected return = risk-free rate + beta * (expected return on the market - risk-free rate)

Expected return% = 3 + 2.5 * (10.5 - 3)

Expected return% = 21.75

As per DDM

Price = recent dividend* (1 + growth rate )/(cost of equity - growth rate)

Price = 1.95 * (1+0.07) / (0.2175 - 0.07)

Price = 14.15