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?
D = $1, D1 = $1 x 1.2, D2 = $1 x 1.22
k = 8.5%
PH = $1 x 1.22 x 1.04
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
Janet Ludlow is preparing a report on U.S.-based manufacturers in the electric toothbrush industry and has gathered the information shown in Tables 12.8 and 12.9. Ludlow’s report concludes that the electric toothbrush industry is in the maturity (i.e., late) phase of its industry life cycle.
a. Select and justify three factors from Table 12.8 that support Ludlow’s conclusion.
b. Select and justify three factors from Table 12.9 that refute Ludlow’s conclusion.
The FI Corporation’s dividends per share are expected to grow indefinitely by 5% per year.
a. If this year’s year-end dividend is $8 and the market capitalization rate is 10% per year, what must the current stock price be according to the DDM?
b. If the expected earnings per share are $12, what is the implied value of the ROE on future investment opportunities?
c. How much is the market paying per share for growth opportunities (that is, for an ROE on future investments that exceeds the market capitalization rate)?
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