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Aplia: Student Question C fi L courses aplia com syildiz-0005&quiz; action Quiz&quiz; prob Guid QN 101000 C44900 00&C; 4 912045 0AAA0559014F7497449EC4F30000 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 $2.7500 dividend at that time (D3 $2.7500 and believes that the dividend will grow by 14.30% 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 3.72% per year. Goodwin's required return is 12.40%. 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 Value Term Horizon value current Intrinsic value -$20T82- If investors expect a total return of 13.40%, what will be Goodwin's expected dividend and capital gains yield in two years-that is, the year before the firm begins paying dividends? Again, remember to carry out the dividend values to four decimal places. (Hint: You are at year 2, and the first dividend is expected to be paid at the end of the year. Find DY d CGY3.) Expected dividend yield (DY3) Expected capital gains yield (CGY 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 a poor. Is this statement a possible explanation for why the firm hasn't paid a dividend yet? O Yes ON Suggestions Timeout 59:18 10:10 P

Explanation / Answer

Solution :

To compute the horizon value P5 = Dividend in 6th year /Ke - G

Dividend in 3th year = $2.7500

grows at 14.3% hence 4th year dividend = 2.75*(1+14.3%) = 3.1432

5th year = 3.1432*(1+14.3%) = 3.5927

hence after that the dividend grows at 5 % constant hence dividend in 6th year = 3.5927*1.05 = 3.7723

P5 = 3.7723/.1240-.05

Price = $50.98

Hence the current Intrinsic Price = present value of future price factor for 5 years , 12.40%

Hence the current Intrinsic price of the stock would be = $50.98*.5574 = $28.42

To compute the dividend yield and expected capital gain

Dividend yield will be zedro since the company has not paid any dividend therefore dividend yield = dividend /MArket price = 0/price = 0

Expected capital gain = Loss because the expected return is 13.40 % whereas the price discounted at 12.40 % hence the stock price 2 years from now would be = 28.42*1.2634 = $35.9058

Whereas the expected price would be = 28.42*1.2860 = 36.5481

Hence the capital LOSS = .6423/35.9058 = 1.79% of loss

Thank you.

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