Question

Signature: Woidtke Manufacturing's stock has supernormal growth of 35 % for Year 0 to Year 1, 30 % for Year 1 to Year 2, 25% for Year 2 to Year 3 and then long-run constant g = 8% a.What is the value of this stock, if n-15% and Do is $4? b.What are dividend yield and capital gains yield?

Answer 1

a. D1 =D0*(1+g1)=4*(1+35%)
D2=4*1.35*1.30
D3 =4*1.35*1.30*1.25
D4=4*1.35*1.30*1.25*1.08
Terminal Value =4*1.35*1.30*1.25*1.08/(15%-8%)=135.3857
Value of this stock =4*(1+35%)/1.15+4*1.35*1.30/1.15^2+4*1.35*1.30*1.25/1.15^3+135.3857/1.15^3 =104.79

b. Value of this stock =4*1.35*1.30/1.15^1+4*1.35*1.30*1.25/1.15^2+135.3857/1.15^2 =115.11
Dividend Yield =D1/Price 0 =4*(1+35%)/104.79 =5.15%
Capital Gain Yield =(115.11-104.79)/104.79 =9.85%