Ch 09: Assignment-Stocks and Their Valuation Goodwin Technologies, a relatively
ID: 1175711 • Letter: C
Question
Ch 09: Assignment-Stocks and Their Valuation 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 $5.5000 dividend at that time (D3 $5.5000) and believes that the dividend will grow by 28.60% for the following two years (D4 and Ds). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate cf 4.38% per year. Goodwin's required return is 14.60%. 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 current intrinsic value [ ? Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is Goodwin's capital gains yield is , and 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: Goodwin's investment opportunities are poor Is this statement a possible explanation for why the firm hasn't paid a dividend yet? O yes O NoExplanation / Answer
Year
expected Dividend
1
2
3
5.5
5.5
4
5.5*1.286
7.073
5
5.5*(1.286)^2
9.095878
6
9.0958*1.0438
9.494196
horizon value
expected dividend in year 6 / (required rate of return-growth rate)
9.494/(14.6%-4.38%)
92.89628
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 14.6%
1
0
0
2
0
0
3
5.5
3.654339
4
7.073
4.100768
5
9.095878
4.601734
5
92.89628
46.99755
Intrinsic value of share
sum of present value of cash flow
59.35
intrinsic value of Expected dividend
3.65+4.10+4.60
12.35
intrinsic value of stock
46.99755
Dividend Yield
12.35/59.35
20.81%
intrinsic value of capital gain
46.99755
intrinsic value of stock
59.35
capital gain yield
46.99/59.35
79.17%
Answer is no
Year
expected Dividend
1
2
3
5.5
5.5
4
5.5*1.286
7.073
5
5.5*(1.286)^2
9.095878
6
9.0958*1.0438
9.494196
horizon value
expected dividend in year 6 / (required rate of return-growth rate)
9.494/(14.6%-4.38%)
92.89628
Year
cash flow
present value of cash flow = cash flow/(1+r)^n r= 14.6%
1
0
0
2
0
0
3
5.5
3.654339
4
7.073
4.100768
5
9.095878
4.601734
5
92.89628
46.99755
Intrinsic value of share
sum of present value of cash flow
59.35
intrinsic value of Expected dividend
3.65+4.10+4.60
12.35
intrinsic value of stock
46.99755
Dividend Yield
12.35/59.35
20.81%
intrinsic value of capital gain
46.99755
intrinsic value of stock
59.35
capital gain yield
46.99/59.35
79.17%
Answer is no