Show how I can solve this, answer is below, THANK YOU! Reizenstein Technologies
ID: 2731387 • Letter: S
Question
Show how I can solve this, answer is below, THANK YOU!
Reizenstein Technologies (RT) has just developed a solar panel capable of
generating 200% more electricity than any solar panel currently on the market. As a
result, RT 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
RT’ s growth rate will slow to 5% per year indefinitely. Stockholders require a return
of 12% on RT’ s stock. The most recent annual dividend (D0 ), which was paid
yesterday, was $1.75 per share.
a. Calculate RT’ s expected dividends for t = 1, t = 2, t = 3, t = 4, and t = 5.
b. Calculate the estimated intrinsic value of the stock today, ^P0 . Proceed by finding the
present value of the dividends expected at t = 1, t = 2, t = 3, t = 4, and t = 5 plus the
present value of the stock price that should exist at t = 5, ^P5 . The ^P5 stock price can be found by using the constant growth equation. Note that to find ^P5 you
use the dividend expected at t = 6, which is 5% greater than the t = 5
dividend.
c. Calculate the expected dividend yield (D1 /P0
^ ), the capital gains yield expected during the first year, and the expected total return (dividend yield plus capital
gains yield) during the first year. (Assume that P0^ = P0 , and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Also calculate these same three yields for t = 5 (e.g., D6 /P5^ ).
a. $2.01, $2.31, $2.66, $3.06, $3.52.
b. P^0 = $39.42.
c. D1 /P0 = 5.10%; D6 /P5 = 7.00%.
Explanation / Answer
t=0 1 2 3 4 5 6 p5 = d6/ke-g dividend 1.75 2.01 2.31 2.66 3.06 3.52 3.70 1.75*(1.15)^1 1.75*(1.15)^2 1.75*(1.15)^3 1.75*(1.15)^4 1.75*(1.15)^5 3.52*(1.05) pvf @ 12% 0.893 0.797 0.712 0.636 0.567 P5 52.85714286 present value 1.7972 1.8446 1.8950 1.9466 1.9958 29.97 39.44914 Expected dividend yield 2.01/39.44 3.70/52.86 5.10% 7.00%