Goodwin Technologies, a relatively young company, has been wildly successful but
ID: 2779944 • Letter: G
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 $1.5000 dividend at that time (Ds- two years (Ds and Ds). However, after the fith year, she expects Goodwin's dividend to grow at a constant rate of 3.42% per year. $1.5000) and believes that the dividend will grow by 7.80% for the following Goodwin's required return is 11.40%. Fill in the following chart to determine 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. Goodwin's horizon value at the horizon Term Value Horizon value Current Intrinsic valueY Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is Goodwin's capital gains yield is and 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 are poor Is this statement a possible explanation for why the firm hasn't paid a dividend yet? No Q Yes DOL bExplanation / Answer
Horizon value = D6/r-g = 1.8027/11.4% - 3.42%
= $22.59
Current intrinsic value = sum of all discounted cash flows = D3/(1 + r)^3 + D4/(1 + r)^4 + D5 / (1 + r)^5 + P5 / (1 + r)^5 = 1.5/(1.114)^3 + 1.617/(1.114)^4 + 1.7431/(1.114)^5+22.59/(1.114)^5
= $16.32
Expected dividend yield = 0. This is becasue the company does not pay a dividend right now.
Capital gain yield = required return = 11.40%
No this statement is not a possible explanation why the company has not paid a dividend. This is because if investment opportunities are poor than the comapny will have no use of its net income and retained earnings. Hence it could have paid dividends out of its accumulated retained earnings which must have grown due to lack of investment opportunities.
D3 D4 D5 D6 Value 1.5000 1.6170 1.7431 1.8027 Growth (in %) 7.80 7.80 3.42Related Questions
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