As companies evolve, certain factors can drive sudden growth. This may lead to a

Question

As companies evolve, certain factors can drive sudden growth. This may lead to a period of nonconstant, or variable, growth. This would cause the company's expected growth rate to increase or decrease, thereby affecting the results of the valuation model. For companies in such situations, you would refer to the nonconstant growth model for the valuation of the company's stock. Consider the case of Green Sun Company: Green Sun Company (GSC) just paid a dividend of $3.12 per share. The company expects the coming year to be very profitable, and its dividend is expected to grow by 16.00% over the next year. After the next year, though, Green Sun's dividend is expected to grow at a constant rate of 3.20% per year. Complete the following table, assuming that the market is in equilibrium, and Term Value Dividends one year from now (D1) Horizon Value (HV) Intrinsic Value The risk-free rate (rRF) is 4.00% The market risk premium (RP) is 4.80%, and . . .Green Sun's beta is 1.90 What is the expected dividend yield for Green Sun's stock today? 9.92% 7.94% 10.88% O 9.61%

Explanation / Answer

Required return accotridng to CAPM=risk free rate+beta*market risk premium=4%+1.9*4.8%=13.12%

D1=D0*(1+growth rate)=3.12*1.16=3.6192
D2=D1*(1+growth rate)=3.6192*(1+3.2%)=3.7350144
HV=D2/(required return-growth rate)=3.7350144/(13.12%-3.2%)=37.65135484
Intrinsic Value=D1/(1+required return)+HV/(1+required return)=3.6192/1.1312+37.65135484/1.1312=36.48387097

Expected Dividend Yield today=3.6192/36.48387097=9.92%
Option A

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