Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per yea

Question

Taussig Technologies Corporation (TTC) has been growing at a rate of 20% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to gn= 6%.

a) If D0= $1.60 and rs= 10%, what is TTC's stock worth today? What are its expected dividend and capital gains yields at this time, that is, during Year 1?

b) Now assume that TTC's period of supernormal growth is to last for 5 years rather than 2 years. How would this affect the price, dividend yield, and capital gains yield? Answer in words only.

c) What will TTC's dividend and capital gains yields be once its period of supernormal growth ends? (Hint: These calues will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth; the calculations are very easy.)

d) Of what interest to investors is the changing relationship between dividend and capital gains yields over time?

Explanation / Answer

Anss...
aD1 = 1.6 * 1.2 =1.92
D2 = 1.92 * 1.2 = 2.304
P2 = 2.304 * 0.94/10%+6%
= 13.536
current price = 1.92/1.1 + 2.304/1.1^2 + 13.536/1.1^2
= 14.84
expected dividend yield = 1.6/14.84 = 10.78%
P1 = 2.304/1.1 + 13.536/1.1 = 14.4
capital gains yield = 14.4 - 14.84 + 1.92/14.84 = 9.97%
b)
price will increase with increase in dividends
since price increases , dividend yield decreases
and capital gains yield increases
c)
dividend yield = 2.304*0.94/13.536 = 16%
capital gains yield = 16%
d)
remains same when growth rate of dividends is constant

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