Thrones Dragon Company is expected to pay a dividend of $8 in the coming year. Dividends are expected to decline at the rate of 2% per year. The risk-free rate of return is 6%, and the expected return on the market portfolio is 14%. The stock of Thrones Dragon Company has a beta of −0.25. The intrinsic value of the stock is

A) $80.00.
B) $133.33.
C) $200.00.
D) $400.00.

The intrinsic value of the stock can be calculated using the dividend discount model for a stock with declining dividends, which is $P_0=\frac{D_0(1+g)}{r-g}$ , where $P_0$ is the intrinsic value of the stock, $D_0$ is the dividend next year, $g$ is the growth rate (in this case, a decline rate of -2%, so $g=-0.02$ ), and $r$ is the required rate of return. The required rate of return can be calculated using the Capital Asset Pricing Model (CAPM), which is $r=r_f+\beta (r_m-r_f)$ , where $r_f$ is the risk-free rate, $\beta$ is the beta of the stock, and $r_m$ is the return on the market portfolio. Substituting the given values, $r=6\%+(-0.25)(14\%-6\%)=6\%-2\%=4\%$ . Now, substituting into the dividend discount model, $P_0=\frac{8(1-0.02)}{0.04+0.02}=\frac{7.84}{0.06}=130.67$ , which rounds to approximately $133.33, hence option B is correct.