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 $1.2500 dividend at that time (Dy = $1.2500) and believes that the dividend will grow by 6.50% 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 3.36% per year. Goodwin's required return is 11.20%. 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. Value Term Horizon value Current Intrinsic value Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is . and Goodwin's capital gains yield is 0.00% 9.79% 9.19% 7.59% Goodwin has been very successful, but it hasn't paid a dividend yet. It circulates a report to Tes 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? NO Yes

Answer 1

Horizon Value = Dividend in Year 6/(Required Return – Growth Rate)

= 1.25(1.0650)² (1.0336)/(11.20%-3.36%)

= $18.69

Current intrinsic value = 1.25/(1.1120)³ + 1.25(1.0650)/(1.1120)⁴ + 1.25(1.0650)²/(1.1120)⁵ + 18.69/(1.1120)⁵

= $13.61

Dividend yield = Expected Dividend next year/Current price

= 0/13.61

= 0%

Capital gains yield = 11.20% (required return)

Yes

Since Dividends are paid out of profits