5. Carla Cardashian would like to purchase the stock of the Cannabalistic Cannabis Corp. The company plans to pay a dividend of $3.58 next year and projects that the dividend will grow to $3.89 per share the following year, and to $3.95 the year after that. Carla plans to be able to sell the stock at the end of that year for $112 per share. She uses the Capital Asset Pricing Model (CAPM) to calculate her required rate of return. The present annual Rate of Return on 10-year U.S. Treasury Notes is 4.6%, the Beta of the company is 1.24, and the expected annual Rate of Return on the stock market for the near future is 18.23%. What is the intrinsic value of the stock?
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CAPM formula: Required Rate of Return = Risk-Free Rate + Beta * (Expected Market Return - Risk-Free Rate) Given: Risk-Free Rate = 4.6% Beta = 1.24 Expected Market Return = 18.23% Required Rate of Return = 4.6% + 1.24 * (18.23% - 4.6%) Required Rate of Return = Show more…
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