Deployment Specialists pays a current (annual) dividend of $1 and is expected to grow at 22% for two years and then at 5% thereafter. If the required return for Deployment Specialists is 11.0%, what is the intrinsic value of its stock

The value of the stock = $19.64

Explanation:

According to the dividend valuation model, the value of a stock is the present value of the expected future cash flows from the stock discounted at the the required rate of return.

Year Workings Present value (PV)

1 $1 * (1.22) * 1.11^ (-1) = 1.10

2 $1 * (1.22) ^2 * (1.11) ^ (-2) = 1.21

3 $1 * ((1.22) ^2 * (1.05)) / 0.11-0.05) = 21.35 (PV in year 2 terms)

PV (in year 0) of Year 3 dividend = 21.35 * 1.11^ (-2)

= 17.33 (see notes)

The value of the stock = $1.10 + $1.21 + 17.3

= $19.64

Notes:

Note the growth applied to year 3 dividend gives the PV in year 2 terms. So we need to re-discount again to year 0.

The value of the stock = $19.64