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

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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