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Q4B

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Essentials Of Investments
Found in: Page 436
Essentials Of Investments

Essentials Of Investments

Book edition 9th
Author(s) Zvi Bodie, Alex Kane, Alan Marcus, Alan J. Marcus
Pages 748 pages
ISBN 9780078034695

Short Answer

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?

$30.60

See the step by step solution

Step by Step Solution

Step 1: Given information

D = $1, D1 = $1 x 1.2, D2 = $1 x 1.22

k = 8.5%

PH = $1 x 1.22 x 1.04

Step 2: Calculation of Intrinsic value

Intrinsic Value V0 = D1 / 1 + k + D2 / (1 + k)2 +……….+ DH + PH / (1 + k )H

$ 1 x 1.2 / 1 + 0.085 + $1 x 1.22 / (1 + 0.085)2 +……$1 x 1.2 x 1.04 / (0.085 – 0.04) x ( 1 + 0.085)2

= $30.60

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