Question

yrk 8 Assume that it is now January 1, 2020. Wayne-Martin Electric Inc. (WME) has developed a solar panel capable of generating 200% more electricity than any other solar panel currently on the market. As a result, WME is expected to experience a 14% annual growth rate for the next 5 years. Other firms will have developed comparable technology by the end of 5 years, and WME's growth rate will slow to 5% per year indefinitely. Stockholders require a return of 13% on WME's stock. The most recent annual dividend (Do), which was paid yesterday, was $1.50 per share. a. Calculate WME's expected dividends for 2020, 2021, 2022, 2023, and 2024. Do not round intermediate calculations. Round your answers to the nearest cent. D2020 = $ D2021 = $ D2022 - $ D2021 - $ D2024 $ b. Calculate the value of the stock today, Po. Proceed by finding the present value of the dividends expected at the end of 2020, 2021, 2022, 2023, and 2024 plus the present value of the stock price that should exist at the end of 2024. The year end 2024 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2024, price, you must use the dividend expected in 2025, which is 5% greater than the 2024 dividend. Do not round intermediate calculations. Round your answer to the nearest cent. c. Calculate the expected dividend yield (D1/Po), capital gains yield, and total return (dividend yield plus capital gains yield) expected for 2020. (Assume that Po - Po and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Do not round intermediate calculations. Round your answers to two decimal places DI/PO Capital gains yield Expected total return Then calculate these came three yelds for 2005. Do not round intermediate calculations. Round your answers to two decimal places DUPS Capital gains yield- Expected total return

Answer 1

Last year Dividend		1.50
growth rate		0.14
dis rate		0.13
5+ growth indefinitely		0.05
	working
Div 2020	Div = 1.5*(1+0.14)	1.71
Div 2021	Div = 1.71*(1+0.14)	1.95
Div 2022	Div = 1.95*(1+0.14)	2.22
Div 2023	Div = 2.22*(1+0.14)	2.53
Div 2024	Div = 2.53*(1+0.14)	2.89

Dividend = last years dividend* (1+ growth rate)

so.

a.	Div 2020	$       1.71
	Div 2021	$       1.95
	Div 2022	$       2.22
	Div 2023	$       2.53
	Div 2024	$       2.89

b. firstly, we need to find the value of stock at the end of 2024,

value of stock at the end of 2024

= 2.89* (1+0.05)/(0.13-0.05)

37.91

so we need to find the value of dividend for infinite time

which is = this year dividend* (1+ growth)/(discount rate – growth)

next years dividend = This years dividend * (1+growth)

Now, to find the price today , we need to discount theses dividend to present value,

Year	Dividend	working	Discount factor = 1/(1+r)^n	Discounted cash Flow= Cash flow * discount value
2020	1.71	1/ (1+0.13)^1	0.88	1.51
2021	1.95	1/ (1+0.13)^2	0.78	1.53
2022	2.22	1/ (1+0.13)^3	0.69	1.54
2023	2.53	1/ (1+0.13)^4	0.61	1.55
2024	2.89	1/ (1+0.13)^5	0.54	1.57
2024	37.91	1/ (1+0.13)^5	0.54	20.57
			Total	28.28

So , price= $28.28

c.

D1/Po= 1.71/28.28

= 0.0605 or 6.05%

Capital gain yield , as given = Return rate – dividend yield

= 0.13-0.0605= 0.0695 or 6.95%

Total return = 13%

Now, to calculate D6= D5* (1+ growth)

D5= 2.89

Growth = 5%

D6= 2.89* (1+0.05)

= 3.0325

P5, price at the end of 2024 as calculated earlier= $37.91

D6/P5= 3.03/37.91

= 0.0800

Or 8%

Expected return = 13%

Capital Yield = 13-8= 5%

d.

I	Correct
II	Incorrect. It is the reverse case, where capital gain is paid at the time of sale and dividend each year
III	Incorrect as the dividend and capital income has different tax calculation and rates
IV	incorrect as dividend is taxed at the time of receiving and capital gain at the time of sales
V	incorrect as dividend is taxed at the time of receiving and capital gain at the time of sales