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 $3.7500 dividend at that time (D3-$3.7500) and believes that the dividend will grow by 19.50% for the following two years (D and Ds). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 3.96% per year. Goodwin's required return is 13.20%. 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. Term Value Horizon value Current Intrinsic value Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is Goodwin's capital gains yield is , and 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's investment opportunities are poor. Is this statement a possible explanation for why the firm hasn't paid a dividend yet? O No O Yes

Answer 1

Yr	Div.	Dividend in $	Workings
1	D1	0	Given
2	D2	0	Given
3	D3	3.75	Given
4	D4	4.4813	D3 * 19.5%
5	D5	5.3552	D4 * 19.5%
6	D6	5.5673	D5 * 3.96%

(a) Horizon value of Goodwin’s stock at the end of year 5 : P₅ = D₆/(ke-g)

P₅ = 5.5673 / (0.132 -0.0396 ) = 5.5673/ 0.0924 = $60.2522

Horizon value = $60.2522

(b)

Yr	Div.	Dividend in $	DF @ 13.20%	DCF($)
1	D1	0	0.8834	0.00
2	D2	0	0.7804	0.00
3	D3	3.75	0.6894	2.5853
4	D4	4.4813	0.6090	2.7291
5	D5	5.3552	0.5380	2.8811
				8.1955

=8.1955 + PV of P5

= 8.1955 + (60.2522 * 0.5380) = $40.6112

Current Intrinsic value = $40.6112

c) ASSUMING................DIVIDEND YIELD IS 0%..............CAPITAL GAIN YIELD IS 13.20%

d)No. statemnt is false

Answer 2 :

First option is correct

Free Cash Flow = 800 - 120 - 25 = 655 million

****only one question has to be done as per policy.