Question

You expect the price of CEMENCO stock to be US$59.77 per share a year from now. Its current market price is US$50.00, and you expect it to pay dividend one year from now of US$2.15 per share.

1. What are the stock’s expected dividend yield, rate of price appreciation, and expected holding – period return?

2. If the stock has a Beta of 1.15, the risk – free rate is 6% per year, and the Expected Rate of Return on the market portfolio is 14% per year. What is the Required Rate of Return on CEMENCO stock?

3. What is the intrinsic value of CEMENCO stock?

Answer 1

i.

where,

D = Expected Dividend

P0 = Current market price

Dividend yield = 4.3%

Rate of price appreciation = 19.54%

Expected holding period Return = 23.84%

ii

As per CAPM, Required rate of return can be calculated with following equation -

where,

k = required rate of return

rf = risk free return

rm = market return

B = Beta

putting the values -

Required rate of return of Cemenco = 15.2%

iii.

Intrinsic value of CEMENCO

Intrinsic value of CEMENCO = $53.75

Hope this will help, please do comment if you need any further explanation. Your feedback would be appreciated.