Horizon Value: a) 31.86 b)18.58 c)26.55 d)22.57 Current Intrinsic Value: a)17.77
ID: 2780924 • Letter: H
Question
Horizon Value: a) 31.86 b)18.58 c)26.55 d)22.57
Current Intrinsic Value: a)17.77 b)8.69 c)19.03 d)19.56
DY3: A) 7.85 B) 7.57 C)10.03 D)9.20
CGY3: A)11.52 B)5.03 C)-4.09 D)1.53
9. Stocks that don't pay dividends yet 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 $1.7500 dividend at that time (D3-$1.7500) and believes that the dividend will grow by 9.10% for the following two years (D4 and Ds). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 3.48% per year. Goodwin's required return is 11.60%. 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. Term Value Horizon value $26.55 Current Intrinsic value If investors expect a total return of 12.60%, 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 DY3 and CGY3.) Expected dividend yield (DY3) Expected capital gains yield (CGY3)Explanation / Answer
Option C
Option C
Option E)None..Option B is what you will get when you commit an error where horizon value is calculated using 11.6% instead of 12.6% and hence capital gains yield will be 12.6-7.57=5.03%..But that is incorrect..None of the options are correct regarding dividend yield and capital gains yield..
Option E)None
D1=0
D2=0
D3=1.75
D4=1.75*1.091
D5=1.75*1.091*1.091
D6=1.75*1.091*1.091*1.0348
Share price now=D1/(1+r)+D2/(1+r)^2................D5/(1+r)^5+Horizon Value/(1+r)^5
=1.75/(1+r)^3+1.75*1.091/(1+r)^4+1.75*1.091*1.091/(1+r)^5+Horizon Value/(1+r)^5
=1.75/1.116^3+1.75*1.091/1.116^4+1.75*1.091*1.091/1.116^5+Horizon Value/(1+r)^5
Horizon Value=D6/(1+r)+D6*(1+g)/(1+r)^2.............
=D6/(r-g)
=1.75*1.091*1.091*1.0348/(0.116-0.0348)=26.55
Hence, share price now or current intrinsic value
=1.75/1.116^3+1.75*1.091/1.116^4+1.75*1.091*1.091/1.116^5+26.545/1.116^5
=19.03
Horizon Value=
=D6/(r-g)
=1.75*1.091*1.091*1.0348/(0.126-0.0348)=23.63465
So, Share price at the end of 2 years
=1.75/1.126+1.75*1.091/1.126^2+1.75*1.091*1.091/1.126^3+23.63465/1.126^3
=21.0742
Dividend yield=D3/P2=1.75/21.07=8.30%..
So, capital gains yield=12.6-8.30=4.3%
Yes it might be making investments right now hence no dividends
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