Question

HW 08-Stocks and Their Valuation 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 $3.2500 dividend at that time (Ds $3.2500) and believes that the dividend will grow by 16.90% for the following two years (D4 and Ds). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 3.84% per year. Goodwin's required return is 12.80% . 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 calaulations, carry the dividend values to four decimal places Value Term Horizon value Current Intrinsic value If investors expect a total return of 13.80 % , what will be Goodwin's expected dividend and capital gains yield in two years-that is, the year before the firm begins paying dividends? Again, remember to carry out the dividend values to four decimal places. (Hint: You are at year 2, and the first dividend is expected to be paid at the end of the year. Find DY3 and CGY3) Expected dividend yield (DY3) Expected capital gains yield (CGY3) 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:

Answer 1

First dividend will be paid 3 years from now. Thus, D, =$3.25. Dividend will grow by 16.90% for 4th and 5th year. Calculate the amount of dividend for 4th and 5th year as follows: D. =D,x(1+g) = $3.25*(1+16.90%) = $3.799250 Ds =D.*(1+g) =$3.799250/(1+16.90%) =$4.44132325 After 5th year, dividends will grow at 3.84% per year. Thus, the horizon value at the horizon date will be price at end of 5th year. Calculate the horizon value using the following formula: _D,*(1+g) P= ko-g $4.44132325*(1+3.48%) 12.8%-3.84% $4.61187006 0.089600 =$51.471764 Thus, the horizon value is $51.47 Compute Current intrinsic value as follows: Intrinsic value = Present value of D, + Present value of D. + Present value of Dg +(Present value of horizon) _ $3.25 $3.799250 $4.44132325 $51.471764 (1+12.8%)' (1+12.8%)* (1+12.8%)" (1+12.8%) = $2.26442+$2.34672+$2.43202 +$28.18536 = $35.22851 Hence, the Current intrinsic value is $35.23 -X Х

Now, the expected total return, which is also the cost of equity is 13.80%. 3) Calculate Dividend yield using the following formula: Annual dividend (D) Dividend yield=2 Share price(P) Calculate price at end of 2nd year as follows: P,=D+ De + Dg_+ Pg ? (1+r)" (1+r) (1+r) (1+r) __ $3.25 $3.799250 $4.44132325 $51.471764 (1+13.8%)' (1+13.8%) (1+13.8%)" (1+13.8%)" = $2.8559+$2.9337+$3.0136+$34.9255 = $43.7286 Hence, the price at year 2 is $43.73 Dividend yield Annual dividend Share price D.-_$3.25 $3.25x100 $43.7286 = 7.4322% Thus, the expected dividend yield is 7.43 - X- 4) Compute capital gain yield as follows: R=Dividend yield+Capital gains yield 13.8%=7.4322%+Capital gains yield Capital gains yield=6.37% Hence, the capital gain yield is 6.37% - X