1-a). D4 = D3 * (1 + g1) = $4.5000 * (1 + 0.2340) = $5.5530
D5 = D4 * (1 + g1) = $5.5530 * (1 + 0.2340) = $6.8524
D6 = D5 * (1 + gC) = $6.8524 * (1 + 0.0414) = $7.1361
Horizon Value = D6 / [r - gC] = $7.1361 / [0.1380 - 0.0414] = $7.1361 / 0.0966 = $73.87
1-b). Current Intrinsic Value = [D3 / (1 + r)3] + [D4 / (1 + r)4] + [(D5 + P5) / (1 + r)5]
= [$4.5000 / (1 + 0.1380)3] + [$5.5530 / (1 + 0.1380)4] + [($6.8524 + $73.87) / (1 + 0.1380)5]
= $3.05 + $3.31 + $42.30 = $48.66
2-a). Expected Current Dividend Yield = D1 / P0 = $0 / $48.66 = 0%
2-b). Expected Capital Gains Yield = Required return - Expected Current Dividend Yield
= 13.8% - 0% = 13.8%
3). Yes, even if dividends and capital gains are taxed at same rate, dividends are taxable in the year they are RECEIVED, while capital gains are taxable only the year they are REALIZED. therefore capital gains potentially have a deferral advantage over dividends.
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