| Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 18% for two years and then at 4% thereafter. If the required return for Deployment Specialists is 7.5%, what is the intrinsic value of Deployment Specialists stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.) |
| Intrinsic value | $ |
Answer :the intrinsic value of Deployment Specialists stock = $ 38.15
Working notes for the above answer
We have provided with the information as follow
| current (annual) dividend | $1 |
| expected to grow for two years | 18% |
| thereafter Growth rate | 4% |
| required return | 7.50% |
D0 = 1
D1 = 1.00 x 1.18 = 1.18
D2 = 1.20 x 1.18 = 1.39
D3 = 1.44 x 1.04 = 1.45
V3 = 1.45/.075-.04
= 41.43
Price at t=0 is the sum of the discounted cash flows…
P0 = 1.18 / 1.075 + 1.39 / 1.095^2 + 41.43 / 1.095^2
(notice that the Price, known IN year 2 based on D3, is discounted 2 years – don’t make the mistake of discounting it 3 years)
…in year 2 you get the year 2 dividend + the price in year 2…
= 1.18 / 1.075 + (1.39 + 41.43) / 1.075^2
= 1.0976 + 1.2049+35.84
= $38.15
