Assume that it is now January 1, 2009. Wayne-Martin Electric Inc. (WME) has just

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 the expected dividend yield, D1/P0, capital gains yield, and total return (dividend yield plus capital gains yield) expected for 2009. (Assume that P ? ?0 ???=???P ? ? ?0 , and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Round your answers to two decimal places.

g. D1/P0 =________________ %
h. Capital gains yield =_______________ %
i. Expected total return = ______________%

Then calculate these same three yields for 2014. Round your answers to two decimal places.

j. D6/P5 =_____________ %
k. Capital gains yield = ________________%
l. Expected total return = _______________%

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 g. D1/P0 = $2.01/$39.46 =5.09% h. P1=P0*(1+Gs) = 39.46*(1+15%)= $45.38 Capital gains yield = (P1-P0)/P0 = (45.38-39.46)/39.46 = 15.00% i. Expected total return =dividend yield plus capital gains yield = 5.09%+15.00%=20.09% j. D6/P5 = 3.70/52.86 = 7.00% k. P6=P5*(1+Gn) = 52.86*(1+5%) = $55.50 Capital gains yield = (P6-P5)/P5 = (55.50-52.86)/52.86 = 4.99% l. Expected total return = dividend yield plus capital gains yield = 7.00+4.99=11.99% or 12%

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