Question

Nonconstant Growth Stock Valuation Conroy Consulting Corporation (CCC) has been growing at a rate of 30% per year in recent years. This same nonconstant growth rate is expected to last for another 2 years (90,1 - 91,2 - 30%). 13% and QL 8%, then what is CCC's stock worth today? Do not round Intermediate calculations. Round your answer to the a. I Do $1.60, nearest cent. What is its expected dividend yield for the first year? Do not round intermediate calculations. Round your answer to two decimal places. What is its capital gains yields for the first year? Do not round intermediate calculations. Round your answer to two decimal places. b. Now assume that CCC's period of nonconstant growth is to last another 5 years rather than 2 years (90.1 = 91.2 - 92,3 = 93,4 = 94,5 - 30%). How would this affect its price, dividend yield, and capital gains yield? I. Due to the longer period of nonconstant growth, the value of the stock will be lower for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the nonconstant growth period. II. Due to the longer period of nonconstant growth, the value of the stock will be higher for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the nonconstant growth period. III. Due to the longer period of nonconstant growth, the value of the stock will be lower for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the nonconstant growth period. IV. Due to the longer period of nonconstant growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the nonconstant growth period V. Due to the longer period of nonconstant growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will remain the same for the duration of the nonconstant growth period -Select-

Answer 1

Value of stock is equal to the present value of all future dividends

= 1.60(1.30)/(1.13) + 1.60(1.30)^2/(1.13)^2 + 1.60(1.30)^2(1.08)/(1.13)^2(13%-8%)

= $49.6991

i.e. $49.70

Dividend yield = Expected Dividend/Current price

= 1.60(1.30)/49.70

= 4.19%

Capital gains yield = 13%-4.19%

= 8.81%

II.Due to the longer period of nonconstant growth, the value of the stock will be higher for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the nonconstant growth period.

e.Price after the end of supernormal growth = $58.41

Dividend yield = 5%

Capital Gains yield = 13%-5% = 8%

V.Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized.