Answer:
$24.587
Explanation:
Given:
Annual dividend paid = $1
Expected growth rate for 2 years = 25% = 0.25
After 2 years growth rate = 5%
required return for deployment specialists = 11.0%
Now,
At the end of year 1, Expected dividend on stock = $1 × (1 + 25% ) = $1.25
At the end of year 2, Expected dividend on stock = $1.25 × (1 + 25%)
= $1.5625
At the end of year 2, Expected dividend on stock = $1.5625 × (1 + 5% )
= $1.640625
and,
Value of stock at the end of Year 2 = [tex]\frac{\textup{Expected dividend on stock at end of Year 3}}{\textup{(Required return - Dividend growth rate)}}[/tex]
= [tex]\frac{\textup{1.640625 }}{\textup{(0.11 - 0.05)}}[/tex]
= $ 27.34375
Therefore,
The Intrinsic value of stock = [tex]\frac{1.25}{(1+0.11)}+\frac{1.5625 + 27.34375}{(1+0.11)^2}[/tex]
= 1.1261 + 23.4610
= $24.587
