can not work out the formula….

Correct, you need to know what the investor’s required rate of return is, however (now someone correct me if I’m wrong) I believe the question is asking you two pieces:

(a) calculate what the investor’s rate of return is, then
(b) calculate the intrinsic value via Gordon Growth.

My initial thoughts are to try to work out part (a) using CAPM, but then again I feel it’s missing something…..

I believe you are correct. Essentially you can ignore the par value and look at the required rate of return versus what payment is being received,

i.e., for an asset that pays $8, what would an investor be willing to pay if their required rate of return is 6% p.a…. therefore $8/6% = $8/0.06 = $133.33

(not sure where the pound key is on my keyboard, so I’ve used dollars instead)

Hey @aramis77

Where
D=dividend=25 pence
k=required return=x
G=growth rate=18%
P=price=1020 pence

feeding it all in you’ll get @dr_pain28’s working:

1020=25/(x-0.18)
x=20.45098%

@Aramis77 – two disclaimers, been a while since I did LI and I don’t work in Fixed Income. By undated, do you mean it’s essentially a perpetuity? Would it not be C/R in that case? i.e. c.£133 in your example?

Well as I say I am by no means certain but I think in this case you simply divide the coupon (£8, assuming annual payment) by the required yield (0.06)… probably too simple to be correct.

@Aramis777.I see were you are going with your thought process @mitch895, maybe the question is asking us to reverse engineer the required rate of return that would price the stock at $1020 (Since we don’t have enough information to compute the CAPM.); although I am not sure if this is what the question is asking. Doing this I came to a rate of return of 20.45098%.

1020=25/(x-0.18)
x=20.45098%

Again I’m not sure if this is what the question is asking you to do, the information from the problem seemed short and incomplete. I hope this helps.

1020=25/(x-0.18)

x-0.18=25/1020

x=25/1020+0.18

x=20.45098%