Problem
You are asked to compute the intrinsic price of a Stock.
A simplified data sheet is given:
Risk-free rate (annualized) = 3%
Expected Return of Equity Market = 8%
Beta of the Stock = 1.3
Dividend declared for this year = $5
1. Solve for the Expected Return of the Stock, round off the answer to two decimal places. List the financial model you have chosen.
You come up with two possible scenarios using the Expected Return of the Stock as the Required Rate of Return for the Stock.
• Scenario I: Assume zero growth in future dividends
• Scenario II: Assume constant growth in future dividends. The suggested growth rate is 2%.
2. Solve for the Intrinsic Value of the Stock for Scenario I, round off the answer to two decimal places.
3. Solve for the Intrinsic Value of the Stock for Scenario II, round off the answer to zero decimal place.
4. Discuss a case in which both calculated intrinsic values fail to be realised.