Question

7. 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 $3.00000 dividend at that time (D₃ = $3.00000) and believes that the dividend will grow by 15.60000% for the following two years (D₄ and D₅). However, after the fifth year, she expects Goodwin’s dividend to grow at a constant rate of 3.78000% per year.

Goodwin’s required return is 12.60000%. 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 13.60%, 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 yet to record a profit (positive net income).

Is this statement a possible explanation for why the firm hasn’t paid a dividend yet?

Yes

No

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8. Corporate valuation model

The corporate valuation model, the price-to-earnings (P/E) multiple approach, and the economic value added (EVA) approach are some examples of valuation techniques. The corporate valuation model is similar to the dividend-based valuation that you’ve done in previous problems, but it focuses on a firm’s free cash flows (FCFs) instead of its dividends. Some firms don’t pay dividends, or their dividends are difficult to forecast. For that reason, some analysts use the corporate valuation model.

Stay Swift Corp. has an expected net operating profit after taxes, EBIT(1 – T), of $14,700 million in the coming year. In addition, the firm is expected to have net capital expenditures of $2,205 million, and net operating working capital (NOWC) is expected to increase by $45 million. How much free cash flow (FCF) is Stay Swift Corp. expected to generate over the next year?

$12,450 million

$16,860 million

$12,540 million

$248,416 million

Stay Swift Corp.’s FCFs are expected to grow at a constant rate of 4.26% per year in the future. The market value of Stay Swift Corp.’s outstanding debt is $65,757 million, and its preferred stocks’ value is $36,532 million. Stay Swift Corp. has 675 million shares of common stock outstanding, and its weighted average cost of capital (WACC) equals 12.78%.

Term	Value (Millions)
Total firm value
Intrinsic value of common equity
Intrinsic value per share

Using the preceding information and the FCF you calculated in the previous question, calculate the appropriate values in this table. Assume the firm has no nonoperating assets.

Answer 1

Submitting the answer to Question 7: Please find attached 2 images for detailed calculations:

7. Using Dividend Growth Model:

where D suffix N, represents the Dividend for the corresponding years.

Abbreviations: PV - Present value, FV - Fair value, RR - Required return, CG - Constant Growth Rate.

Answers:

Part I:

Horizon Value = $47.1717

Current Intrinsic value = $29.61347

Part II:

Expected Dividend Yield DY3 = 9.5%

Expected Capital Gains Yield = 7%.

Part III:

Yes. Dividends are paid out of the net income earned by the company for a given year. Since, Goodwin has not yet recorded a profit, it could be a possible explanation for not paying dividend.