Question

Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 20% for two years and then at 3% thereafter. If the required return for Deployment Specialists is 10.0%, what is the intrinsic value of its stock

Answer 1

Answer:

the intrinsic value of its stock is  $19.78

Explanation:

Given the information:

• D0 = $1
• required return for Deployment Specialists is 10.0%,
• (1+0.2) =  Dividend for next 2 year  

                                           Year           Year             Year

                                            0                    1                 2

                                                                 20%            20%

Dividend                              1                    1.2            1.44

After this the next thing to do is to take out terminal value , were we will use the growth rate of 4%

= Dividend for second year x (1+growth rate thereafter)  /( R - growth rate thereafter)

= $1.44( 1 + 3% ) / (10% - 3%)

= $21.18

=> the intrinsic value of its stock

= Dividend year 1/ (1+ R) + (Dividend year 2 + Terminal value) /$(1+R)^{2}$

=  $1.20 / (1+10%)  + ($1.44 + $21.18) / $(1+0.1)^{2}$

= $19.78

So the intrinsic value of its stock is  $19.78