Question

21. Problem 9.21 (Nonconstant Growth) еВook Assume that it is now January 1, 2019. 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 11% on WME's stock. The most recent annual dividend (Dn), which was paid yesterday, was $1.77 per share. a. Calculate WME's expected dividends for 2019, 2020, 2021, 2022, and 2023. Do not round intermediate calculations. Round your answers to the nearest cent D2019 $ D2020 $ D2021 $ D2022 $ D2023 $ b. Calculate the value of the stock today, Po, Proceed by finding the present value of the dividends expected at the end of 2019, 2020, 2021, 2022, and 2023 plus the present value of the stock price that should exist at the end of 2023. The year end 2023 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2023, price, you must use the dividend expected in 2024, which is 5% greater than the 2023 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 2019. (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. D1/Po % Capital gains yield = % Expected total return % Then calculate these same three yields for 2024. Do not round intermediate calculations. Round your answers to two decimal places. D6/P5

Answer 1

a.Dividend for the year = Dividend last year(1+Growth rate)
D2019	2.02
2020	2.30
2021	2.62
2022	2.99
2023	3.41

Price at the end of year 5 = 3.41(1.05)/(11%-5%)

= $59.68

Stock Price today = 2.02/(1.11) + 2.30/(1.11)^2 + 2.62/(1.11)^3 + 2.99/(1.11)^4 + 3.41/(1.11)^5 + 59.68/(1.11)^5

= $45.01

Dividend yield = Expected Dividend/Current Price

= 2.02/45.01

= 4.49%

Capital gains yield = 6.51%

Total return = 11%

D6/P5 = 6%

Capital Gains Yield = 5%

Total Return = 11%

III.High income taxes will delay

I.

II