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

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 $1.25 dividend at that time (D3=$1.25) and believes that the dividend will grow by 6.50% for the following two years (D4 and D5). 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%. The horizon value is $18.96.

1. What is the current intrinsic value?

a)$7.61

b) $13.60

c) $13.97

d) $12.69

If investors expect a total return of 12.20%, what will be Goodwin’s expected dividend and capital gains yield in two years-that is, the year before the firm begins paying dividends? (Hint: you are at year 2, and the first dividend is expected to be paid at the end of the year. Find DY3 and CGY3).

2. Expected dividend yield (DY3):

a) 7.62%

b) 9.19%

c) 7.59%

d) 9.79%

3. Expected capital gains yield (CGY3):

a) -4.26%

b) 11.12%

c) -1.12%

d) 4.58%

Goodwin has been very successful, but hasn’t paid a dividend yet. It circulates a report to its key investors containing the following statement: “Goodwin’s investment opportunities are poor”

4. Is this statement a possible explanation for why the firm hasn’t paid a dividend yet?

a) No

b) Yes

Explanation / Answer

Question1: What is the current intrinsic value

D3 = 1.25

D4 =1.25 * 1.0650 = 1.33

D5 =1.33*1.065 = 1.417

D6 = 1.42 * 1.0336 = 1.465

P5 = D6/(Ke - g) = 1.465/(0.112-0.0336)

P5 = 18.6916

So P0 = 1.25/1.112^3 + 1.33/1.112^4 + 1.417/1.112^5 + 18.6916/1.12^5 = $13.60

Current Intrinsic price = $13.60 (Option b)

Question 2: Dividend and capital gains yield

Current price is 13.60

So Price in 2 years = 13.60*1.112^2 = 16.40

Hence Dividend Yield = 1.25/ 16.40 = 7.62%(Option a)

Capital gain Yield = 12.2% - 7.62% = 4.58% (Option d)

4. It does not explain why the firm has not paid dividends. Hence answer is a) NO

Related Questions

Navigate

• Browse (All)
• Browse G
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.