Yesterday, September 22, 2009, Wireless Logic Corp. (WLC) paid its annual divide

Question

Yesterday, September 22, 2009, Wireless Logic Corp. (WLC) paid its annual dividend of $1.25 per share. Because WLC’s financial prospects are particularly bright, investors believe that the company will increase its dividend by 20 percent per year for the next four years. After that, WLC will increase the dividend at a modest annual rate of 4 percent. Investors require a 16 percent return on WLC stock, and WLC always makes its dividend payment on September 22 of each year.

a. What is the price of WLC stock on September 23, 2009?

b. What is the price of WLC stock on September 23, 2010?

c. Calculate the percentage change in price of WLC stock from September 23, 2009, to September 23, 2010.

d. For an investor who purchased WLC stock on September 23, 2009, received a dividend on September 22, 2010, and sold the stock on September 23, 2010, what was the total rate of return on the investment? How much of this return came from the dividend, and how much came from the capital gain?

e. What is the price of WLC stock on September 23, 2013?

f. What is the price of WLC stock on September 23, 2014?

g. For an investor who purchased WLC stock on September 23, 2013, received a dividend on September 22, 2014, and sold the stock on September 23, 2014, what was the total rate of return on the investment? How much of this return came from the dividend, and how much came from the capital gain? Comment on the differences between your answers to this question and your answers to part (d).

Explanation / Answer

Details Sep 22 2009 Sep 22 2010 Sep 22 2011 Sep 22 2012 Sep 22 2013 Sep 22 2014 Dividend /Expected Dividend                 1.25                   1.50                   1.80              2.16                  2.59                    2.70 Terminal Cash flow Sep 22 2014 =2.70*1.04/(0.16-0.04)                  23.36 Future Cash Flows                   1.50                   1.80              2.16                  2.59                  26.06 PV Factor @16% 1               0.8621              0.7432         0.6407              0.5523                0.4761 PV Of Cash Flows at Sep 29 2009                   1.29                   1.34              1.38                  1.43                  12.41 a WLC stock Value on Sep 23 ,2009. $          17.85 PV factor of future Cash Flows Sep 23 2010                         1              0.8621         0.7432              0.6407                0.5523 PV of future Cash Flows Sep 23 2010              1.5517         1.6052              1.6606             14.3917 b WLC Stock Price on Sep 203,2010=PV Of Cash Flows after Sep 23,2010 $          19.21 c % Change in Price over Sep 23 2009= 7.60% d Capital GAin at the sale                 1.36 Dividend Income =                 1.50 Total Income $            2.86 Dividend Income % 8.40% Net Income = 16.00% Capital Gain %= 7.60% e PV factor of future Cash Flows Sep 23 2013                        1                  0.862 PV of future Cash Flows Sep 23 2013 $          22.46 $              22.46 WLC Stock Price on Sep 203,2013=PV Of Cash Flows after Sep 23,2013 $          22.46 f WLC Stock Price on Sep 203,2014=PV Of Cash Flows after Sep 23,2014 $          23.36 % Change in Price over Sep 23 2013= 4.00% Capital GAin at the sale                 0.90 Dividend Income =                 2.70 Total Income $            3.60 Dividend Income % 6.68% Net Income = 16.02% Capital Gain %= 4.00% Difference of the result with d is   that the dividend income as % has increased significantly over the years but the Capital gain has reduced.

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