Deployment Specialists pays a current (annual) dividend of $1 and is expected to
ID: 2774495 • Letter: D
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.) intrinsic value $ A firm has current assets that could be sold for their book value of $38 million. The book value of its fixed assets is $76 million, but they could be sold for $106 million today. The firm has total debt with a book value of $56 million, but interest rate declines have caused the market value of the debt to increase to $66 million. What is the ratio of the market value of equity to its book value? (Round your answer to 2 decimal places.) Market-to-book ratio Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 20% for two years and then at 4% 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.) Intrinsic value $Explanation / Answer
5) Using Dividend Discount Model,
Intrinsic Value of Stock = D1/ (1 + ke) + D2/ (1 + ke)2 + [D3/(ke-g)] / (1 + ke)2
D1 = D0 * (1 + g) = 1 * 1.18 = $1.18
D2 = D1 * (1 + g) = 1.18 * 1.18 = $1.3924
D3 = D2 * (1 + g) = 1.3924 * 1.04 = $1.448096
ke = Required Return on Equity = 7.5%
Terminal Value in year 2 = D3/(ke-g) = 1.448096/(7.5% - 4%) = 1.448096/3.5% = $41.3742
Thus,
Intrinsic Value = 1.18/(1 + 7.5%) + (1.3924 + 41.3742)/(1 + 7.5%)2
= 1.0977 + 37.0073 = $38.10
A) Market Value of Fixed Assets = $106 million
Market Value of Current Assets = $38 million
Market Value of Total Assets = 106 + 38 = $144 million
Market Value of Debt = $66 million
Market Value of Equity = Market Value of Total Assets - Market Value of Debt = 144 - 66 = $78 million
Book Value of Fixed Assets = $76 million
Book Value of Current Assets = $38 million
Book Value of Total Assets = 76 + 38 = $114 million
Book Value of Debt = $56 million
Book Value of Equity = Book Value of Total Assets - Book Value of Debt = 114 - 56 = $58 million
Ratio of Market Value of Equity to its Book Value also known as Market to Book Ratio
= 78 / 58 = 1.34
B) Intrinsic Value of Stock = D1/ (1 + ke) + D2/ (1 + ke)2 + [D3/(ke-g)] / (1 + ke)2
D1 = D0 * (1 + g) = 1 * 1.20 = $1.20
D2 = D1 * (1 + g) = 1.20 * 1.20 = $1.44
D3 = D2 * (1 + g) = 1.44 * 1.04 = $1.4976
ke = Required Return on Equity = 8.5%
Terminal Value in year 2 = D3/(ke-g) = 1.4976/(8.5% - 4%) = 1.4976/4.5% = $33.28
Thus,
Intrinsic Value = 1.20/(1 + 8.5%) + (1.44 + 33.28)/(1 + 8.5%)2
= 1.1059 + 29.4931 = $30.60
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