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 $3.50000 dividend at that time (D3 = $3.50000) and believes that the dividend will grow by 18.20000% 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 3.90000% per year. Goodwin's required return is 13.00000%. 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 14.00%, 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 CGY3.) Expected dividend yield (DY3) Expected capital gains yield (CGY:) 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: Investors prefer the deferred tax liability that capital gains offer over dividends. Is this statement a possible explanation for why the firm hasn't paid a dividend yet? Yes NO

Answer 1

Horizon Value = Dividend Year 6/(Required Rate-growth) =D0*(1+growth 1)^2*(1+growth 2)/(r-growth 2)
=3.5*(1+18.2%)^2*(1+3.9%)/(13%-3.9%) =55.8312 or 55.83

Current Intrinsic Value =PV of Dividends + PV of Horizon Value
=3.5/(1+13%)^3+3.5*(1+18.2%)/(1+13%)^4+3.5*(1+18.2%)^2/(1+13%)^5+55.8312/(1+13%)^5 =37.92

At r=14%
Horizon Value =Dividend Year 6/(Required Rate-growth) =D0*(1+growth 1)^2*(1+growth 2)/(r-growth 2)
=3.5*(1+18.2%)^2*(1+3.9%)/(14%-3.9%) =50.3034

Price at year 2=D3/(1+r)+D4/(1+r)^2+D5/(1+r)^3+50.3034/(1+r)^4
=3.5/1.14+3.5*(1+18.2%)/1.14^2+3.5*(1+18.2%)^2/1.14^3+50.3034/1.14^3 =43.5074

Dividend Yield = Dividend in Year 3/ Price 2 =3.5/43.5074=8.04%
Capital Gain = Required Rate - Dividend Yield = 14%-8.04% =5.96%

No,the explanation is wrong