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Stocks that don't pay dividends yet Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend
Stocks that don't pay dividends yet Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $5.25000 dividend at that time (Ds = $5.25000) and believes that the dividend will grow by 27 30000% for the following two years Da and Ds). However, after the fifth year, she expects Goodwins dividend to grow at a constant rate of 4.32000% per year.
Goodwin's required return is 14.40000%. Fill in the following chart to determine Goodwin's horizon value at the horizon date (when constant growth begins) and the current intrinsic value. To increase the accuracy of your calculations, do not round your intermediate calculations, but round all final answers to two decimal places
Term Value
Horizon value
Current intrinsic value
Assuming that the markets are in equilibrium, Goodwin's current expected dividend yield is----------- ,and Goodwin's 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 yet to record a profit (positive net income)
Is this statement a possible explanation for why the firm hasn't paid a dividend yet?
O Yes
O No
Expert Solution
Answer:
1. Horizon value = Value at the end of year 5
= 5.25(1.273)2 (1.0432)/(14.4%-4.32%)
= $88.05
2. Current Intrinsic Value = Present value of all future dividends
= 5.25/(1.144)3 + 5.25(1.273)/(1.144)4 + 5.25(1.273)2/(1.144)5 + 88.05/(1.144)5
= $56.69
3. Expected Dividend Yield = Dividend Year1/Current Price = 0%
Price after 1 year = 56.69*1.144 = $64.85
Capital Gains Yield = (64.85-56.69)/56.69
= 14.39% or 14.4% approx.
4. Yes, dividends are paid out of income. If there is no positive income, it is reasonable that dividends are not paid
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