1. Deployment Specialists pays a current (annual) dividend of $1 and is expected
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Question
1. 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.)
2. The market capitalization rate for Admiral Motors Company is 9%. Its expected ROE is 15% and its expected EPS is $7. If the firm’s plowback ratio is 40%.
a) Calculate the growth rate. (Input your answer as a nearest whole percent.)
b) what will be its P/E ratio? (Do not round intermediate calculations.)
3. Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter are expected to grow at the constant rate of 4% per year. The risk-free rate is 4%, and the expected return on the market portfolio is 11%. The stock has a beta of 0.70.
a) Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b) What is the intrinsic value of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
2. The market capitalization rate for Admiral Motors Company is 9%. Its expected ROE is 15% and its expected EPS is $7. If the firm’s plowback ratio is 40%.
a) Calculate the growth rate. (Input your answer as a nearest whole percent.)
b) what will be its P/E ratio? (Do not round intermediate calculations.)
3. Miltmar Corporation will pay a year-end dividend of $5, and dividends thereafter are expected to grow at the constant rate of 4% per year. The risk-free rate is 4%, and the expected return on the market portfolio is 11%. The stock has a beta of 0.70.
a) Calculate the market capitalization rate. (Do not round intermediate calculations. Round your answer to 2 decimal places.)
b) What is the intrinsic value of the stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)
Explanation / Answer
1 Year Nature Cashflow PV Factor @ 8.5% Discounted Cashflow A B A*B 1 Dividend 1.18 0.9217 1.09 2 Dividend 1.39 0.8495 1.18 2 Market Price at the end of Year 2 59.04 0.8495 50.15 Intrinsic Value of Stock 52.42 Re = 8.5% Constant growth rate = g = 6% after 2 years Dividend Calculations Year Calculation Amount 1 D1 = 1* 1.18 1.18 2 D2 = 1* 1.18^2 1.39 D3 = 1* 1.18^2*1.06 1.48 Market Price at the end of Year 2 = D3 / (Re - g) Market Price at the end of Year 2 = 1.48 / (0.085 - 0.06) = $ 59.04 2 Growth rate = (plow-back ratio) x (ROE) = 0.4 x 0.15 = 6% Exp Div = Exp EPS x (1-plow-back ratio) = 7 x (1-0.4) = $4.2 Using Dividend Growth Model, Price = Expected Div / Re - g = 4.2 / 0.09 - 0.06 = $140 P/E Ratio = Stock Price/ EPS = $140 / 7 = 20 times 3 As per CAPM, Market Capitalization rate is calculated as Re = Risk Free rate of return + (Market Return - Risk Free rate)*Beta = 4% + (11% - 4%) * 0.7 = 8.9% Intrinsic Value of Stock = Expected Dividend / (Re - g) = 5 / (0.089 - 0.04) = $102.04
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