Question

9. Stocks that don't pay dividends yet 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 $5.25000 dividend at that time (D2 - $5.25000) and believes that the dividend will grow by 27.30000% for the following two years (De and D.). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 4.32000% per year Goodwin's required return is 14.40000%. 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, do not round your intermediate calculations, but round all final answers to two decimal places. Term Value Horizon value Current intrinsic value If investors expect a total return of 15.40%, 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 DY, and CGY..)

Answer 1

Solution

1) Horizon Value = Dividend for year 6th

Ke-Growth

   = D3 (1+g)² (1+growth of year 5)

Ke-g

= 5.25 (1.2730)² (1.0432)

0.1440-0.0432

=8.8753

0.1008

=$88.05

2) Current Intrinsic value

= D3   + D4 + D5+P5

(1+r)³ (1+r)⁴ (1+r)⁵

= 5.25  + 6.6832 + 8.5078 + 88.05

(1.1440)³ (1.1440)⁴ (1.1440)⁵

= 3.5065 + 3.9019 + 49.27857

= $56.69

3) Expected Dividend yield

Dividend yield = Expected Dividend next year/Current price

= 0/$56.69

= 0%

4) Capital gains yield = 14.40% (required return)

Yes

Since Dividends are paid out of profits

Please give thumbs up if you like my answer :-)