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 $5.5000 dividend at that time (D3 = $5.5000) and believes that the dividend will grow by 28.60% 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 4.38% per year. Goodwin's required return is 14.60%. 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, carry the dividend values to four decimal places. Value Term Horizon value Current Intrinsic value If investors expect a total return of 15.60%, 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: Goodwin has a large selection of profitable investment opportunities, Is this statement a possible explanation for why the firm hasn't paid a dividend yet? Yes O No

Answer 1

1]	Year	Expected Dividend	PVIF at 14.6%	PV at 14.6%
	1	$                      -	0.87260	$                -
	2	$                      -	0.76143	$                -
	3	$             1.5000	0.66443	$              1.00
	4	$             1.9290	0.57978	$              1.12
	5	$             2.4807	0.50591	$              1.26
	PV of dividends t1 to t5			$              3.37
	Horizon value of dividends = 2.4807*1.0438/(0.146-0.0438) =	$               25.34
	PV of Horizon value = 25.34/1.146^5 =			$            12.82
	Current intrinsic value			$            16.19
2]	Price at t2:
	Year	Expected Dividend	PVIF at 15.6%	PV at 15.6%
	1	$                      -		$                -
	2	$                      -		$                -
	3	$             1.5000	0.86505	$              1.30
	4	$             1.9290	0.74831	$              1.44
	5	$             2.4807	0.64733	$              1.61
	PV of dividends t1 to t5			$              4.35
	Horizon value of dividends = 2.4807*1.0438/(0.156-0.0438) =	$               23.08
	PV of Horizon value = 23.08/1.156^3 =			$            14.94
	Price at t2 =			$            19.29
	Price at t3:
	Year	Expected Dividend	PVIF at 15.6%	PV at 15.6%
	1	$                      -		$                -
	2	$                      -		$                -
	3			$                -
	4	$             1.9290	0.86505	$              1.67
	5	$             2.4807	0.74831	$              1.86
	PV of dividends t1 to t5			$              3.53
	Horizon value of dividends = 2.4807*1.0438/(0.156-0.0438) =	$               23.08
	PV of Horizon value = 23.08/1.156^2 =			$            17.27
	Price at t2 =			$            20.80
	Dividend yield = 1.50/19.29 =	7.78%
	Capital gains yield = 20.80/19.29-1 =	7.83%
	Total yield	15.60%
3]	Is this statement a possible explanation for …...........dividend yet?
	No.

REVISED SOLUTION:

1]	Year	Expected Dividend	PVIF at 14.6%	PV at 14.6%
	1	$                           -	0.87260	$                -
	2	$                           -	0.76143	$                -
	3	$                 5.5000	0.66443	$              3.65
	4	$                 7.0730	0.57978	$              4.10
	5	$                 9.0959	0.50591	$              4.60
	PV of dividends t1 to t5			$            12.35
	Horizon value of dividends = 9.0959*1.0438/(0.146-0.0438) =	$                    92.90
	PV of Horizon value = 92.90/1.146^5 =			$            47.00
	Current intrinsic value			$            59.35
2]	Price at t2:
	Year	Expected Dividend	PVIF at 15.6%	PV at 15.6%
	1	$                           -		$                -
	2	$                           -		$                -
	3	$                 5.5000	0.86505	$              4.76
	4	$                 7.0730	0.74831	$              5.29
	5	$                 9.0959	0.64733	$              5.89
	PV of dividends t1 to t5			$            15.94
	Horizon value of dividends = 9.0959*1.0438/(0.156-0.0438) =	$                    84.62
	PV of Horizon value = 84.62/1.156^3 =			$            54.78
	Price at t2 =			$            70.72
	Price at t3:
	Year	Expected Dividend	PVIF at 15.6%	PV at 15.6%
	1	$                           -		$                -
	2	$                           -		$                -
	3			$                -
	4	$                 7.0730	0.86505	$              6.12
	5	$                 9.0959	0.74831	$              6.81
	PV of dividends t1 to t5			$            12.93
	Horizon value of dividends = 9.0959*1.0438/(0.156-0.0438) =	$                    84.62
	PV of Horizon value = 84.62/1.156^2 =			$            63.32
	Price at t2 =			$            76.25
	Dividend yield = 5.5/70.72 =	7.78%
	Capital gains yield = 76.25/70.72-1 =	7.82%
	Total yield	15.60%
3]	Is this statement a possible explanation for …...........dividend yet?
	No.