Stocks that don\'t pay dividends yet Complete the following table after determin
ID: 2763723 • Letter: S
Question
Stocks that don't pay dividends yet
Complete the following table after determining the horizon value, or the value of Goodwin’s stock at the end of year—when the constant growth rate begins—and the current intrinsic value or value of Goodwin Technologies’ stock.
Assuming that the markets are in equilibrium, Goodwin’s current expected dividend yield is-------- , and its capital gains yield is----------- .
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 has a large selection of profitable investment opportunities.---------------------------------------------------
Is this statement a possible explanation for why the firm hasn’t paid a dividend yet?
Yes
No
Term Value Horizon value of Goodwin’s stock at the end of year 5 ---------------------- Current intrinsic value of Goodwin Technologies’ stock ------------------------Explanation / Answer
Dividend yield = current year dividend /current price = 0/16.318 = 0%
Capital gains yield = (price next year-current price)*100/current price
Price next year:
Capital gains yield = (18.178-16.318)*100/16.318 = 11.4%
The statement is a possible explanation for why the firm hasn’t paid a dividend yet because firm would require investment to enter into these profitable opportunities which would be best to finance with internally generated profits without giving out dividends
required return = 11.4% Year Previous year dividend Dividend growth rate Dividend current year Horizon value Total Value Discount factor Discounted value 1 0 0.0% 0 0 1.114 0 2 0 0.0% 0 0 1.240996 0 3 0 0.0% 1.5 1.5 1.382469544 1.085014861 4 1.5 7.8% 1.617 1.617 1.540071072 1.049951544 5 1.617 7.8% 1.743126 22.59073821 24.33386421 1.715639174 14.18355595 Long term growth rate= 3.42% Value of stock = Sum of discounted value 16.31852235 18.65200256 Discount factor= (1+required rate)^N Discounted value= total value/discount factor Total value = dividend + terminal value Terminal value = year 5 dividend*(1+long term growth rate) /( equity cost of capital - long term growth rate)