Question

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Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 24%...

Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 24% for two years and then at 6% thereafter. If the required return for Deployment Specialists is 10.0%, what is the intrinsic value of its stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Intrinsic value

Expert Solution

Step-1, Dividend for the next 2 years

Dividend in Year 0 (D0) = $1.00 per share

Dividend in Year 1 (D1) = $1.24 per share [$1.00 x 124%]

Dividend in Year 2 (D2) = $1.5376 per share [$1.24 x 124%]

Step-2, The Price of the stock in year 2 (P2)

Dividend Growth Rate after 2 years (g) = 6% per year

Required Rate of Return (Ke) = 10.00%

Therefore, the Share Price in year 2(P2) = D2(1 + g) / (Ke – g)

= $1.5376(1 + 0.06) / (0.10 – 0.06)

= $1.6299 / 0.04

= $40.75 per share

Step-3, The Intrinsic Value of the stock

As per Dividend Discount Model, Current Intrinsic Value is the aggregate of the Present Value of the future dividend payments and the present value the share price in year 2

Year	Cash flow ($)	Present Value factor at 10%	Present Value of cash flows ($)

1	1.2400	0.90909	1.13
2	1.5376	0.82645	1.27
2	40.75	0.82645	33.67

TOTAL			$36.07

“Therefore, the Intrinsic Value of the stock would be $36.07”

NOTE

The Formula for calculating the Present Value Factor is [1/(1 + r)ⁿ], Where “r” is the Discount/Interest Rate and “n” is the number of years.

jeff jeffy answered 1 year ago

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