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23 May, 19:27

Hampton Corporation's common stock dividends are expected to grow by 8% per year. Recently, the firm paid a $3.00 common stock dividend. Hampton has a beta of 1.40. The expected return on the S&P 500 index is 12.5% and the rate of return on U. S. Treasury securities is 7%. Using this information and the CAPM, what is the stock's intrinsic value?

a) $72

b) $66.67

c) $24

d) $48.36

e) $25.92

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  1. 23 May, 19:30
    0
    d) $48.36

    Explanation:

    For computing the intrinsic value, first we have to compute the cost of equity by using CAPM Model which is shown below:

    Expected rate of return = Risk-free rate of return + Beta * (Market rate of return - Risk-free rate of return)

    = 7% + 1.4 * (12.5% - 7%)

    = 7% + 1.4 * 5.5%

    = 7% + 7.7%

    = 14.70%

    Now the intrinsic value would be

    In this question, we apply the Gordon model which is shown below:

    = Next year dividend : (Required rate of return - growth rate)

    where,

    Current year dividend

    = $3 + $3 * 8%

    = $3 + 0.24

    = $3.24

    The other items rate would remain the same

    Now put these values to the above formula

    So, the value would equal to

    = 3.24 : (14.70% - 8%)

    = $48.36
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