Assume that it is now January 1, 2009. Wayne-Martin Electric Inc. (WME) has just
ID: 2668904 • Letter: A
Question
Assume that it is now January 1, 2009. Wayne-Martin Electric Inc. (WME) has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, WME is expected to experience a 15% annual growth rate for the next 5 years. By the end of 5 years, other firms will have developed comparable technology, and WME's growth rate will slow to 5% per year indefinitely. Stockholders require a return of 12% on WME's stock. The most recent annual dividend (D0), which was paid yesterday, was $1.75 per share.
Calculate WME's expected dividends for 2009, 2010, 2011, 2012, and 2013. Round your answers to two decimal places.
a. D2009 = _________
b. D2010 = _________
c. D2011 = _________
d. D2012 = _________
e. D2013 = _________
f. Calculate the value of the stock today, P ? ?0 ? . Proceed by finding the present value of the dividends expected at the end of 2009, 2010, 2011, 2012, and 2013 plus the present value of the stock price that should exist at the end of 2013. The year-end 2013 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2013, price, you must use the dividend expected in 2014, which is 5% greater than the 2013 dividend.
(Round your answer to two decimal places)______________________
Explanation / Answer
Supernatural growth rate gs=15% for 5 yrs Then normal growth gn =5% a. Do=1.75, Ks=12% D1 = D2009=DO*(1+Gs) = 1.75*(1+15%) = $2.01 D2 = D2010=D1*(1+Gs) = 2.01*(1+15%) = $2.31 D3=D2011=D2*(1+Gn) = 2.31*(1+15%) = $2.66 D4=D2012=D3*(1+Gn) = 2.66*(1+15%) = $3.06 D5=D2013=D4*(1+Gn) = 3.06*(1+15%) = $3.52 B. D6=D2014=D5*(1+Gn) = 3.52*(1+5%) = $3.70 P5 = D6/(Ks-Gn) = 3.70/(12%-5%) = $52.86 P0 will be given by below eqn as It has supernormal growth for 5yrs & then becomes a consant growth stock. So Horizion Value at Y5 = P5/(1+ks)^5 = $52.86 /(1+12%)^5 = $29.99 P0 = D1/(1+ks)^1 + D2/(1+Ks)^2 + D3/(1+Ks)^3+ D4/(1+Ks)^4+ D5/(1+Ks)^5+Horizon Value at Y5 ie P0 = 2.01/(1+12%)^1 + 2.31/(1+12%)^2 + $2.66/(1+12%)^3 + $3.06/(1+12%)^4 + $3.52/(1+12%)^5 + 29.99 ie P0 = $39.46