Question

Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 22% for two years and then at 5% thereafter. If the required return for Deployment Specialists is 11.0%, what is the intrinsic value of its stock

Answer 1

The value of the stock = $19.64

Step-by-step explanation:

According to the dividend valuation model, the value of a stock is the present value of the expected future cash flows from the stock discounted at the the required rate of return.

Year Workings Present value(PV)

1 $1 × (1.22) × 1.11^(-1) = 1.10

2 $1 × (1.22)^2 ×(1.11)^(-2) = 1.21

3 $1 × ((1.22)^2 × (1.05))/0.11-0.05) = 21.35 ( PV in year 2 terms)

PV (in year 0) of Year 3 dividend = 21.35 × 1.11^(-2)

= 17.33 (see notes)

The value of the stock = $1.10+ $1.21 + 17.3

= $19.64

Notes:

Note the growth applied to year 3 dividend gives the PV in year 2 terms. So we need to re-discount again to year 0.

The value of the stock = $19.64