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Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend
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 $2.25000 dividend at that time (D? = $2.25000) and believes that the dividend will grow by 11.70000% for the following two years (D? and D?). However, after the fifth year, she expects Goodwin’s dividend to grow at a constant rate of 3.60000% per year.
Goodwin’s required return is 12.00000%. Goodwin’s horizon value at the horizon date (when constant growth begins) is $34.62 and the current intrinsic value is $24.44.
If investors expect a total return of 13.00%, what will be Goodwin’s expected dividend and capital gains yield in two years—that is, the year before the firm begins paying dividends? Again, remember to carry out the dividend values to four decimal places. (Hint: You are at year 2, and the first dividend is expected to be paid at the end of the year. Find DY? and CGY?.)
Expected dividend yield:
a. 8.23%
b. 8.11%
c. 9.21%
d. 10.28%
Expected capital gains:
a. 4.17%
b. 11.92%
c. -3.93%
d. 4.77%
Expert Solution
Answer : Calculation of Horizon Value and Intrinsic Value :
Below is the table showing Horizon and Intrinsic Value
| Year | Dividend | PVF @12% | Present Value of Dividend |
| 1 | 0 | 0.892857143 | 0 |
| 2 | 0 | 0.797193878 | 0 |
| 3 | 2.25 | 0.711780248 | 1.601505558 |
| 4 | 2.51325 (2.25*1.117) | 0.635518078 | 1.597215811 |
| 5 | 2.80730025(2.51325*1.117) | 0.567426856 | 1.592937554 |
| 5(Horizon value) | 34.62(Working Note) | 0.567426856 | 19.64622983 |
| Intrinsic Value | 24.44 |
Working Note : Calculation of Horizon Value :
Horizon Value = Dividedn in year 6 / (Required Return - Growth Rate)
= [2.8073 * 1.036] / (0.12 - 0.036)
= 34.62
Intrinsic Value = 24.44
Calculation of Expected dividend Yield :
For calculation of expected dividend yield and capital gain yield, we have to calculate Price at t3 and t3 and also expected return has been change to 13% :
Price at t2 :
| ar | Dividend | PVF @13% | Present Value of Dividend |
| 1 | 0 | 0 | |
| 2 | 0 | 0 | |
| 3 | 2.25 | 0.884955752 | 1.991150442 |
| 4 | 2.51325 | 0.783146683 | 1.968243402 |
| 5 | 2.80730025 | 0.693050162 | 1.945599894 |
| 5 (Horizon Value) | 30.94 | 0.693050162 | 21.44299457 |
| Intrinsic Value | 27.35 |
Working Note : Calculation of Horizon Value :
Horizon Value = Dividedn in year 6 / (Required Return - Growth Rate)
= [2.8073 * 1.036] / (0.13 - 0.036)
= 30.94
Intrinsic Value = 27.35
Dividend Yield = (Dividend in Year 3) / Price at Year 2
= 2.25 / 27.35
= 8.23%
Price at T3
| Year | Dividend | PVF @13% | Present Value of Dividend |
| 1 | 0 | 0 | |
| 2 | 0 | 0 | |
| 3 | 0 | 0 | |
| 4 | 2.51325 | 0.884955752 | 2.224115044 |
| 5 | 2.80730025 | 0.783146683 | 2.19852788 |
| 5 | 30.94 | 0.783146683 | 24.23058387 |
| Total | 28.65 |
Working Note : Calculation of Horizon Value :
Horizon Value = Dividedn in year 6 / (Required Return - Growth Rate)
= [2.8073 * 1.036] / (0.13 - 0.036)
= 30.94
Intrinsic Value = 28.65
Capital Gain Yield = (28.65 / 27.35) - 1
= 4.77%
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