Deployment Specialists pays a current (annual) dividend of $1 and is expected to

Question

Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 18% for two years and then at 4% thereafter. If the required return for Deployment Specialists is 7.5%, what is the intrinsic value of Deployment Specialists stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

    

Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 18% for two years and then at 4% thereafter. If the required return for Deployment Specialists is 7.5%, what is the intrinsic value of Deployment Specialists stock? (Do not round intermediate calculations. Round your answer to 2 decimal places.)

Explanation / Answer

To compute the intrinsic value Po = dividend (return - growth rate)

which is also known as dividend discount model or gordans formula:

first we need to compute the terminal value at the end of 2 years :

hence = dividend after 2 years growth /(Ke- growth thereafter)

$1*1.18= 1.18 at the end of 1 year and again multiply by 18% we get dividend = $1.3924

Terminal value = 1.3924/(.75-.04)

= $39.78

now we need to discount to arrive at the present value

= 1.18/(1+.075)^1+ 1.3924//(1+.075)^2+ 39.78/(1+.075)^2

= Hence the intrinsic value = $36.73

Dividend Discount value 7.5% Present value 1.18 0.93 1.1 1.39 0.87 1.2 39.78 0.87 34.42 intrinsic value 36.73

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