Question

In: Finance

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

  

Solutions

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.


Related Solutions

TCU Corp. pays a current dividend of $5 per year, which is expected to grow by...
TCU Corp. pays a current dividend of $5 per year, which is expected to grow by 10% the next two years, then by 6% for the following two years, and from year 5 and on maintain a 3% constant growth. The discount rate is 8%. Calculate the current price of one share of TCU Corp.
A stock just paid an annual dividend of $2.7. The dividend is expected to grow by...
A stock just paid an annual dividend of $2.7. The dividend is expected to grow by 6% per year for the next 4 years. The growth rate of dividends will then fall steadily by 0.25% per year, from 6% in year 4 to 5% in year 8 and stay at that level forever. The required rate of return is 12%. What is the expected dividend in 8 years? What is the expected stock price in 8 years? What should be...
A stock just paid an annual dividend of $1.4. The dividend is expected to grow by...
A stock just paid an annual dividend of $1.4. The dividend is expected to grow by 10% per year for the next 4 years. The growth rate of dividends will then fall steadily from 10% after 4 years to 4% in year 8. The required rate of return is 12%. Question: 1. What is the stock price if the dividend growth rate will stay 4% forever after 8 years? 2. In 8 years, the P/E ratio is expected to be...
A stock just paid an annual dividend of $1.6. The dividend is expected to grow by...
A stock just paid an annual dividend of $1.6. The dividend is expected to grow by 9% per year for the next 4 years. The growth rate of dividends will then fall steadily from 9% after 4 years to 4% in year 8. The required rate of return is 12%. What is the stock price if the dividend growth rate will stay 4% forever after 8 years?
Krispy Kreme just paid a (annual) dividend of $1, which is expected to grow at 10%...
Krispy Kreme just paid a (annual) dividend of $1, which is expected to grow at 10% for two years and then at 4% thereafter. If the required return on Holliday Investments is 7.5%, what is the intrinsic value of Holliday Investments stock?
Suppose that a company pays annual dividends that are expected to grow at a constant rate...
Suppose that a company pays annual dividends that are expected to grow at a constant rate of 6% per year forever. The company just paid a dividend of $2. If the market requires an annual return of 14% on this stock, what should we expect the price to be in 5 years?
Ebrahim corp pays an annual dividend of R3.50 per ordinary share. The dividend is expected to...
Ebrahim corp pays an annual dividend of R3.50 per ordinary share. The dividend is expected to grow at an annual rate of 8% for the Next three years followed by 10% in the fourth year before it grows At a constant rate of 5% from the fifth year of infinity. The company’s Required return on similar investments is 15%. What is the value of each ordinary share in the company
1. A) A stock just paid a dividend of $1.16. The dividend is expected to grow...
1. A) A stock just paid a dividend of $1.16. The dividend is expected to grow at 24.14% for five years and then grow at 4.69% thereafter. The required return on the stock is 12.47%. What is the value of the stock? B) A stock just paid a dividend of $2.34. The dividend is expected to grow at 28.45% for two years and then grow at 3.72% thereafter. The required return on the stock is 10.49%. What is the value...
New Gadgets, Inc., currently pays no dividend but is expected to pay its first annual dividend...
New Gadgets, Inc., currently pays no dividend but is expected to pay its first annual dividend of $5.50 per share exactly 7 years from today. After that, the dividends are expected to grow at 3.5 percent forever. If the required return is 12.5 percent, what is the price of the stock today? $35.17 $61.11 $26.79 $30.14 $49.71
1. HF Corporation just paid a dividend of $4.00. The dividend is expected to grow by...
1. HF Corporation just paid a dividend of $4.00. The dividend is expected to grow by 8% this year, 6% in year two and 5% in year three. Beginning in year four, the dividend is expected to grow at a constant rate of 4%. With a required return of 10%, what is a share of this company’s stock worth today? 2. TP Company report FCF of $800,000 in the most recently completed year. FCF is expected to grow by 10%...
ADVERTISEMENT
ADVERTISEMENT
ADVERTISEMENT