2. Stocks that don\'t pay dividends yet Aa Aa Goodwin Technologies is a relative

Question

2. Stocks that don't pay dividends yet Aa Aa Goodwin Technologies is a relatively young company. Goodwin has been wildly successful, but it has yet to pay a dividend. An analyst has forecasted that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $2.50 dividend at that time (D3 = $2.50), and believes the dividend will grow by 30% for the following two years (D4 and D5). However, after five years, she expects Goodwin's dividend to grow at a constant rate of 7% per year. If Goodwin's required return is 12.6%, what is Goodwin's horizon value at the horizon date-when constant growth begins? $80.73 $88.64 $86.94 $77.94 O $79.31 What is Goodwin's current intrinsic value? O $58.85 O $47.81 O $50.71 $55.09 O $49.71 What are Goodwin's current expected dividend and capital gains yields? Expected dividend yield (DYo) Expected capital gains yield (CGYo -

Explanation / Answer

Soln : After 5 years the dividend is growing at constant rate of 7%, hence the horizon value or terminal value will be the perpetuity value of the stock i.e. H = Initial Dividend value/(k-g)

where k = required return , g= dividend growth rate, Initial dividend value at 6th year = 2.5*1.3*1.3*1.07 = 4.52

H = 4.52/(0.126-0.07) = $80.73, option 1 is correct.

Goodwin's current intrinsic value = 0 + 0 + 2.5/1.126^3 + 3.25/1.126^4 + 4.225/1.126^5 + 80.73/1.126^5 = $50.71

Capital Gain yield = (80.73- 50.71)/50.71 = 59.19%

Current expected dividend yield = 0/50.71 = 0%

Stock price after 2 years should be = 2.5/1.126 + 3.25/1.126^2 + 4.225/1.126^3 + 80.73/1.126^3 = $64.29

Dividend yield = 0 , Capital Gain yield = (80.73-64.29)/64.29 = 25.57%

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