Goodwn tech , a relativelyu young company, has been wildly successful but has ye

Question

Goodwn tech , a relativelyu young company, has been wildly successful but has yet to pary a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $3.00 dividend at that time and believes that the dividend will grow by 15.6% for the following two years. However, after the fifth year, she expects Goodwin dividend to grow at a constant rate of 3.78% per year.

Goodwin required a 12.60%.

What is the horizon value_______ at the horizon date when constant growth begins- and what is the current intrinsic value____?

Goodwin has been very successful, but iot hasnot paid a dividend yet. It circulates a report to its key investores 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 or no

Explanation / Answer

DIV3 3 DIV4=3*(1.156) 3.47 DIV5=DIV4*1.156 4.01 Expected Rate of Return 12.60% Price at end of 5th year=PV of Dividends=3/(1.126^3)+3.47/(1.126^4)+4.01/(1.126^5) 6.48 Current Intrinsic Value=6.48+PV of perpetuity Dividend 4.01=6.48+DOV5/(r-g)=6.48+4.01/(0.126-0.0378) 51.94 Dividend distribution decisions are based on investment opportunities. If there are good investment opportunities (Return >Cost of capital) , they will invest there to increase the shareholders wealth which will reflect as increased stock price in the market.If there are no opportunity , they will distribute the dividend.

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