Question

Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $5.5000 dividend at that time (D3 = $5.5000) and believes that the dividend will grow by 28.60% for the following two years (D4 and Ds). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 4.38% per year. Goodwin's required return is 14.60%. Fill in the following chart to determine Goodwin's horizon value at the horizon date-when constant growth begins-and the current intrinsic value. To increase the accuracy of your calculations, carry the dividend values to four decimal places. Value Term Horizon value Current Intrinsic value If investors expect a total return of 15.60%, what will be Goodwin's expected dividend and capital gains yield in two years—that is, the year before the firm begins paying dividends? Again, remember to carry out the dividend values to four decimal places. (Hint: You are at year 2, and the first dividend is expected to be paid at the end of the year. Find DY3 and CGY3.) Expected dividend yield (DY3) Expected capital gains yield (CGY3) Goodwin has been very successful, but it hasn't paid a dividend yet. It circulates a report to its key investors containing the following statement: Goodwin has a large selection of profitable investment opportunities, Is this statement a possible explanation for why the firm hasn't paid a dividend yet? Yes O No

Options: Horizon value: $92.90, $78.97, $65.03, $111.48 Current intrinsic value: 61.41, 55.70, 59.35, 17.35 Expected Dividend yield %: 9.79, 7.23, 11.92, 9.27 Expected Capital gains yield%: 14.53, 8.37, -2.85, 21.37

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Answer 1

Horizon Value (In Case of Constant Growth Rate) : To=Do (1+g)/k-g

Where , To= Horizon Value/Terminal Vlaue

Do= Cash flows at a future point in time which is immediately prior to N+1, or at the end of period N, which is the final year in the projection period

g= Constant Growth Rate (Here, g=4.38%)

k=Discount Rate/Required Rate of Return ( Here, k= 14.60%)

Hence,

Do, is calculated as below,

Expected Dividend	D3 (Present)	5.5000
Expected Dividend	D4 (At Growth Rate 28.60%)	7.0730
Expected Dividend	D5(At Growth Rate 28.60%)	9.0959
Expected Dividend	D6(At Growth Rate 4.38%)	9.4943

To= 9.4943 (1+4.38%)/(14.60%-4.38%)= 96.9680

Current Intrinsic Value = Discounted Value of all future cash flow till the final year of projection (i.e D6)

Time	Projected Dividend	[email protected]%	Discounted Dividend
D3	5.5000	1.000	5.5000
D4	7.0730	0.854	6.0403
D5	9.0959	0.708	6.4399
D6	9.4943	0.562	5.3358
Yield=	31.1632	Intrinsic Value=	23.3160

Expected Dividend Yield :

Yield at Growth Rate of 14.60% = 31.1632

Yield at Growth Rate of 15.60% = 33.2976

Expected Dividend Yield Rate = 12.38% (Final Year of Projection)   

Expected Capital Gain Yield = 33.30% (i.e 33.2976/100)