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 $1.50000 dividend at that time (D₃ = $1.50000) and believes that the dividend will grow by 7.80000% for the following two years (D₄ and D₅). However, after the fifth year, she expects Goodwin’s dividend to grow at a constant rate of 3.42000% per year.

Goodwin’s required return is 11.40000%. 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, do not round your intermediate calculations, but round all final answers to two decimal places.

Term	Value
Horizon value
Current intrinsic value

Assuming that the markets are in equilibrium, Goodwin’s current expected dividend yield is   , and Goodwin’s capital gains yield is   .

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 yet to record a profit (positive net income).

Is this statement a possible explanation for why the firm hasn’t paid a dividend yet?

Yes

No

Answer 1

Rate positively ..

ans a	Computation of horizon value at the end of 5 year = Dividend for 6th year / (required rate - growth rate)
		year	dividend
		3	$     1.50
		4	$     1.62	1.5*107.8%
		5	$     1.74	1.62*107.8%
		6	$     1.80	1.74*103.42%
	therefore horizon value =			=1.8/(11.4%-3.42%)
				22.59
ans b	Current intrensic value = Present value of future cash flow @ 11.4% rate of return
			i	ii	iii=i+ii	iv	v=iii*iv
		year	dividend	horizon value	Total cash flow	PVIF @ 11.4%	present value
		3	$     1.50		1.50	0.7233432	$                              1.09
		4	$     1.62		1.62	0.6493207	$                              1.05
		5	$     1.74	22.59	24.33	0.5828731	$                            14.18
							$                            16.32
	therefore intrensic value=						$                            16.32
ans c		Expected dividend at the end of year/Price at the beginning of year
		Price in beginning of year - 1
			i	ii	iii=i+ii	iv	v
		year	dividend	horizon value	Total cash flow	PVIF @ 11.4%	present value
		3	$     1.50		1.50	0.8058044	$                              1.21
		4	$     1.62		1.62	0.7233432	$                              1.17
		5	$     1.74	22.59	24.33	0.6493207	$                            15.80
							$                            18.18
		Dividend yield = 0/18.18					0.00%
		Capital gain yield = 11.4%-0					12.84%
ans d	Correct answer is option : YES