Goodwin Technologies, a relatively young company, has been wildly successful bat

Question

Goodwin Technologies, a relatively young company, has been wildly successful bat has yet to pay a dividend. An analyst forecast that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $1.5000 dividend at that time (D_3 = $1.5000) and believes that the dividend will grow by 7.80% for the following two years (D_4 and D_5). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 3.42% per year. Goodwin's required return is 11.40%. 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. Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is and Goodwin's capital gains yield is 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 ore poor. Is this statement a possible explanation for why the firm hasn't paid a dividend yet? Yes No

Explanation / Answer

Dividend (D3) = $1.5

Growth rate in two years = 7.8 %

After 5th year = 3.42%

D4 = 1.617, D5 = 1.743

D6 = 1.80

Goodwin’s required rate of return = 11.4%

P = D6/(Ke – g)

= 1.80 / (11.4 – 3.42)

= 22.59 (approx)

Current expected dividend yield = dividend per share / price per share

= 1.80 / 22.59 * 100

= 7.97

Goodswin’s capital gain yield = (P1 - P0)/ P0 * 100

= (16.33 – 22.59)/ 22.59

= -.27.71

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