Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 18% for two years and then at 6% thereafter. If the required return for Deployment Specialists is 8.5%, what is the intrinsic value of Deployment Specialists stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Answer : intrinsic value of Deployment Specialists stock = $ 55.2
Working notes for the above answer
We have been provided with the information that,
Current dividend of $1 and it is expected to grow at 18% for two years and then at 6% thereafter.
So Devidend for the year 1 and year 2 is as follow
D1 = Do*g=1*1.18
=1.18
D2 = D1*g
=1.18*1.18
=1.39
Now we will find D3 and onwards ,
We have been given that after two year dividend growth rate remains 6% thereafter
So D3=D2*1.06
=1.39*1.06
=1.47
–
Value at the second year end will be as follow
=1.47/0.085-0.06
=1.47/0.025
=58.8
No we will make prasent value for all of them
No we will make prasent value for all of them
| Future value | PV factor | Prasent value |
|
| D1 | 1.18 | 0.921659 | 1.087558 |
| D2 | 1.39 | 0.849455 | 1.180743 |
| D3 | 1.47 | 0.782908 | 1.150875 |
| V2 | 58.8 | 0.849455 | 49.94797 |
| 55.2 |
55.2
intrinsic value of Deployment Specialists stock =$ 55.2
