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Homework answers / question archive / Hampton Corporation's common stock dividends are expected to grow by 8% per year
Hampton Corporation's common stock dividends are expected to grow by 8% per year. Recently, the firm paid a $2.50 common stock dividend. Hampton has a beta of 1.40. The expected return on the S&P 500 index is 11% and the rate of return on U.S. Treasury securities is 5%. What is the stock's intrinsic value? 542 554 550
Answer : $50
Calculation :
Intrinsic Value = Expected dividend / (required return - growth rate)
Required return using CAPM = Risk free + beta (market return - risk free rate)
Required return = 5% + 1.40 (11%-5%)
= 5% + 8.4% ==> 13.4%
Intrinsic Value = 2.50*(1+8%) / 13.4%-8%
= 2.7 / 5.4% ==> 50
