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Richards Ltd
Richards Ltd. pays dividends annually on its common shares. The latest dividend of $0.75 per share was paid last week. The dividends are expected to grow at 8% per year for the next two years, after which a growth rate of 4% is expected to be maintained indefinitely. Based on the dividend valuation model, what is the intrinsic value of Richards common shares if the beta on the common shares is 1.25, the risk-free rate is 3%, the market price of risk is 6%?
1. $22.74
2. $12.91
3. $8.55
4. $12.47
Expert Solution
Computation of Required Rate of Return using CAPM:
Required Rate of Return = Risk-free Rate + Beta*Market Risk Premium
= 3% + 1.25*6%
= 3% + 7.50%
Required Rate of Return = 10.50%
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