Reizenstein Technologies (RT) has just developed a solar panel capable of genera
ID: 2771665 • Letter: R
Question
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 18% 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 7% per year indefinitely. Stockholders require a return of 18% on RT’s stock. The most recent annual dividend (D0), which was paid yesterday, was $1.50 per share.
Calculate the capital gains yield expected during the first year (Recognize that the capital gains yield is equal to the total return minus the dividend yield.)
12.00% 6.90% 18.00% 5.10% 9.99%Explanation / Answer
The value of a non-constant growth stock can be determined using the following equation:
D1
1.50
(1+.18)
=
1.50(1.18)
=
$1.77
D2
1.77
(1+.18)
=
1.77(1.18)
=
$2.09
D3
2.09
(1+.18)
=
2.09(1.18)
=
$2.47
D4
2.47
(1+.18)
=
2.47(1.18)
=
$2.91
D5
2.91
(1+.18)
=
2.91(1.18)
=
$3.43
D6
3.43
(1+.18)
=
3.43(1.18)
=
$3.67
P0
=
1.77
+
2.09
+
2.47
+
2.91
+
3.43
1.18^1
1.18^2
1.18^3
1.18^4
1.18^5
3.67
(1+.18)^-5
.18-.07
Expected dividend yield = D1/P0 = 1.77/22.08 = 8%
Capital gain = 18%-8%= 9.99%
D1
1.50
(1+.18)
=
1.50(1.18)
=
$1.77
D2
1.77
(1+.18)
=
1.77(1.18)
=
$2.09
D3
2.09
(1+.18)
=
2.09(1.18)
=
$2.47
D4
2.47
(1+.18)
=
2.47(1.18)
=
$2.91
D5
2.91
(1+.18)
=
2.91(1.18)
=
$3.43
D6
3.43
(1+.18)
=
3.43(1.18)
=
$3.67