Ch 09: Assignment-Stocks and Their Valuation Goodwin Technologies, a relatively

Question

Ch 09: Assignment-Stocks and Their Valuation 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 $5.5000 dividend at that time (D3 $5.5000) and believes that the dividend will grow by 28.60% for the following two years (D4 and Ds). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate cf 4.38% per year. Goodwin's required return is 14.60%. 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. Term Value Horizon value current intrinsic value [ ? Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is Goodwin's capital gains yield is , and 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's investment opportunities are poor Is this statement a possible explanation for why the firm hasn't paid a dividend yet? O yes O No

Explanation / Answer

Year

expected Dividend

1

2

3

5.5

5.5

4

5.5*1.286

7.073

5

5.5*(1.286)^2

9.095878

6

9.0958*1.0438

9.494196

horizon value

expected dividend in year 6 / (required rate of return-growth rate)

9.494/(14.6%-4.38%)

92.89628

Year

cash flow

present value of cash flow = cash flow/(1+r)^n r= 14.6%

1

0

0

2

0

0

3

5.5

3.654339

4

7.073

4.100768

5

9.095878

4.601734

5

92.89628

46.99755

Intrinsic value of share

sum of present value of cash flow

59.35

intrinsic value of Expected dividend

3.65+4.10+4.60

12.35

intrinsic value of stock

46.99755

Dividend Yield

12.35/59.35

20.81%

intrinsic value of capital gain

46.99755

intrinsic value of stock

59.35

capital gain yield

46.99/59.35

79.17%

Answer is no

Year

expected Dividend

1

2

3

5.5

5.5

4

5.5*1.286

7.073

5

5.5*(1.286)^2

9.095878

6

9.0958*1.0438

9.494196

horizon value

expected dividend in year 6 / (required rate of return-growth rate)

9.494/(14.6%-4.38%)

92.89628

Year

cash flow

present value of cash flow = cash flow/(1+r)^n r= 14.6%

1

0

0

2

0

0

3

5.5

3.654339

4

7.073

4.100768

5

9.095878

4.601734

5

92.89628

46.99755

Intrinsic value of share

sum of present value of cash flow

59.35

intrinsic value of Expected dividend

3.65+4.10+4.60

12.35

intrinsic value of stock

46.99755

Dividend Yield

12.35/59.35

20.81%

intrinsic value of capital gain

46.99755

intrinsic value of stock

59.35

capital gain yield

46.99/59.35

79.17%

Answer is no

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