Question

Your broker has recommended that you purchase stock in National Bank & Trust, Inc. National Bank & Trust recently paid its annual dividend of $8. Dividends have consistently grown at a rate of 3.80%. Analysts estimate that the stock has a beta of 1.19. The current risk-free rate is 2.30% and the market return is 11.50%.

Assuming that CAPM holds, what is the intrinsic value of this stock?

a) $87.89 b)$96.64 c) $82.65 d) $89.42 e) $86.88

Answer 1

A) $87.89

Step-by-step explanation:

To calculate the current price of National's stock we can use the following formula:

current stock price = D1 / Kcs - g

where:

• g =3.8%
• D1 = $8 x (1 + 0.038) = $8.304
• Kcs = 0.023 + 1.19 (0.115 - 0.023) = 0.13248

current stock price = $8.304 / (0.13248 - 0.038) = $8.304 / 0.09448 = $87.89