Question

Deployment specialists pays a current (annual) dividend of $1 and is expected to grow at 25% for two years and then at 5% thereafter. if the required return for deployment specialists is 11.0%, what is the intrinsic value of deployment specialists stock? (do not round intermediate calculations. round your answer to 2 decimal places.) intrinsic value $

Answer 1

$24.587

Step-by-step explanation:

Given:

Annual dividend paid = $1

Expected growth rate for 2 years = 25% = 0.25

After 2 years growth rate = 5%

required return for deployment specialists = 11.0%

Now,

At the end of year 1, Expected dividend on stock = $1 × (1 + 25% ) = $1.25

At the end of year 2, Expected dividend on stock = $1.25 × (1 + 25%)

= $1.5625

At the end of year 2, Expected dividend on stock = $1.5625 × (1 + 5% )

= $1.640625

and,

Value of stock at the end of Year 2 =
`\frac{\textup{Expected dividend on stock at end of Year 3}}{\textup{(Required return - Dividend growth rate)}}`

=
`\frac{\textup{1.640625 }}{\textup{(0.11 - 0.05)}}`

= $ 27.34375

Therefore,

The Intrinsic value of stock =
`(1.25)/((1+0.11))+(1.5625 + 27.34375)/((1+0.11)^2)`

= 1.1261 + 23.4610

= $24.587