Caribou Gold Mining Corporation is expected to pay a dividend of $6 in the upcoming year. Dividends are expected to decline at the rate of 3% per year. The risk-free rate of return is 5%, and the expected return on the market portfolio is 13%. The stock of Caribou Gold Mining Corporation has a beta of .5. Using the constant-growth DDM, the value of the stock is _________. A. $150 B. $50 C. $100 D. $200
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To calculate the value of the stock using the constant-growth Dividend Discount Model (DDM), we'll use the formula:
Stock Price = Dividend / Required Rate of Return - Growth Rate
Given:
Dividend (D) = $6
Growth Rate (g) = 3% = 0.03
Required Rate of Return (r) = Risk-free rate + Beta * (Market return - Risk-free rate)
r=5%+0.5×(13%−5%)
Let's calculate the required rate of return (r)
r = 5%+0.5×(13%−5%)
r = 5%+0.5×8%
r = 5%+4%
r = 9%
Now, we can calculate the stock price:
Stock Price = 6 / 0.09−0.03
Stock Price = 6/ 0.06
Stock Price = 100
Therefore, the value of the stock according to the constant-growth DDM is:
C. $100