Question

D Quest Taussig Technologies Corporation (TTC) has been growing at a rate of 15% per year in recent years. This same supernormal growth rate is expected to la for another 2 years (81-g2=15%). If Do=$2, 1s=13%, and gL=8%, then what is TTC's stock worth today? If TTC's period of supernormal growth is to last another 5 years rather than 2 years, how would this affect its dividend yield and capital gains yield? O 48.85, dividend yield will start off higher and capital gains yield will start off lower. O 44.78, dividend yield will start off lower and capital gains yield will start off higher None of the above 44.78, dividend yield off

Answer 1

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

= 2*(1.15)/(1.13) + 2*(1.15)^2/(1.13)^2 + 2*(1.15)^2(1.08)/(1.13)^2(13%-8%)

= $48.85 per share

When the supernormal growth lasts longer, the price will be higher today and hence, dividend yield which is equal to dividend/current price will be lower

Hence, the answer is

$48.85, dividend yield will start off lower and capital gains yield will start off higher