Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth DDM, the value of the stock is . A. 17.65 B. 50 C. 4 D. 37.50

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Todd Mountain Development Corporation is expected to pay a dividend of $3 in the upcoming year. Dividends are expected to grow at the rate of 8% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 17%. The stock of Todd Mountain Development Corporation has a beta of .75. Using the constant-growth DDM, the intrisic value of the stock is . A. 17.65 B. 50 C. 4 D. 37.50

50

Explanation:

Todd mountain development corporation is expected to pay a dividend of $3

The dividend is expected to grow at the rate of 8%

= 8/100

= 0.08

The risk free rate of return is 5%

= 5/100

= 0.05

The expected return on the market portfolio is 17%

= 17/100

= 0.17

The beta is 0.75

The first step is to calculate the discount rate

K= 0.05+0.75(0.17-0.05)

= 0.05+0.75(0.12)

= 0.05+0.09

= 0.14

Therefore, using the constant growth DDM the intrinsic value can be calculated as follows

Vo= 3/0.14-0.08

Vo= 3/0.06

Vo= 50

Hence the intrinsic value of the stock is 50