9. Stocks that don\'t pay dividends yet Goodwin Technologies, a relatively young
ID: 2796063 • Letter: 9
Question
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 $5.0000 dividend at that time (D3 = $5.0000) and believes that the dividend will grow by 26.00% 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 4.26% per year. Goodwin's required return is 14.20%. 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 $83.26 Current Intrinsic value $16.15 $50.66 $54.02 Assuming that the markets are in equilibrium, Goodwin's currer$55.84 nd yield is Goodwin's capital gains yield is 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: Investors prefer the deferred tax liability that capital gains offer over dividends Is this statement a possible explanation for why the firm hasn't paid a dividend yet? O Yes O NoExplanation / Answer
Calculation of future dividends:
Year
Growth
Working
Dividend
3
NA
5
4
26%
5*1.26
6.3
5
26%
6.3*1.26
7.938
6
4.26
7.938*1.0426
8.2762
Dividend becomes stable at year 6
So here we can apply dividend growth model
Price at 5th year end = next dividend/ ke-g
=8.2762/(.1420-.0426)
Price at 5th year end =83.26
Calculation of current price
Year
Inflow
PVF @ 14.20%
Present Value
3
5
0.671
3.355
4
6.3
0.588
3.7044
5
7.938
0.515
4.0880
5
83.26
0.515
42.8789
Current Price
54.02
Year
Growth
Working
Dividend
3
NA
5
4
26%
5*1.26
6.3
5
26%
6.3*1.26
7.938
6
4.26
7.938*1.0426
8.2762
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