Respuesta :
The intrinsic value of Confusion's stock today is $20.60. Hence, option (C) will be regarded as the relevant answer choice for this question.
Give a brief account on intrinsic value.
An object or endeavour has intrinsic value if it derives its value from within itself, or, to put it another way, independent of other external causes. In addition to the stock's apparent market price on any given day, financial experts create models to calculate what they believe to be the intrinsic worth of a company's stock. An indicator of an investment opportunity is the difference between the market price and the projected intrinsic value by an analyst. Value investors are those who believe that these models provide a reasonable estimate of intrinsic value and who would act on that estimate when making investment decisions.
To solve the question :
Required Return of Stock = Risk free Rate + Beta × (Expected Return of market - Risk free Rate)
Required Return of Stock = 16.5 % (4 % + 1.25 × (14 % - 4 %))
Expected Dividend in upcoming year i.e., (D1) = $2
Expected Price 1 year from now i.e., (P1) = $22
Intrinsic value of Confusion's stock today (P0):
P0 = (D1 + P) / (1 + Ke)^1
P0 = (2 + 22) (1 + 0.165)^1
P0 = 24 / 1.165
P0 = 20.60086
P0 = $20.60
Therefore, intrinsic value is $20.60.
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