Taussig Technologies Corporation (TTC) has been growing at a rate of 13 percent

Question

Taussig Technologies Corporation (TTC) has been growing at a rate of 13 percent per year in recent years. This same growth rate is expected to last for another 2 years.

a. If D?0???=???$2.00? , r?s???=???13.00?% and g?n???=???8?% what is TTC's stock worth today? Round your answer to two decimal places at the end of the calculations.

b. What is its expected dividend yield at this time? Round your answer to two decimal places at the end of the calculations.

c. What are its capital gains yields at this time? Round your answer to two decimal places at the end of the calculations.

What will TTC's dividend yield and capital gains yield be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth; the calculations are very easy.)
Round your answers to two decimal places.

e. Dividend yield.

f. Capital gains yield.

Explanation / Answer

a. D1 = D0 (1 + g s) = $1.6(1.20) = $1.92. D2 = D0 (1 + g s)2 = $1.60(1.20)2 = $2.304. P2 = D3 /Ks – g n D3 = D2 (1 + g n) = 2.304 (1.06) = 2.44224 P2 = 2.44224 / (0.10 – 0.06) = $61.06 P0 = PV of D1 + PV of D2 + PV of P2 = D1/ (1 + 0.10) + D2/ (1 + 0.10)2 + P2/ (1 + 0.10)2 = 1.92/ (1 + 0.10) + 2.304/ (1 + 0.10)2 + 61.06/ (1 + 0.10)2 = $54.11 Part 2: Expected dividend yield: D1/P0 = $1.92/$54.11 = 3.55%. Capital gains yield: First, find P1 which equals the sum of the present values of D2 and P2 discounted for one year. P1 = 2.303/ (1 + 0.10) + 61.06/ (1 + 0.10) = $57.60 Second, find the capital gains yield: = P1 – P0 P0 = 57.60 – 54.11 54.11 = 6.45% Dividend yield = 3.55% Capital gains yield = 6.45 k s = 10.00%. b. Due to the longer period of supernormal growth, the value of the stock will be higher for each year. Although the total return will remain the same, ks = 10%, the distribution between dividend yield and capital gains yield will differ: The dividend yield will start off lower and the capital gains yield will start off higher for the 5-year supernormal growth condition, relative to the 2-year supernormal growth state. The dividend yield will increase and the capital gains yield will decline over the 5-year period.

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