Question

Assume that Techtron is a constant growth company with a required rate of return of 13 percent whose last dividend (D0, which was paid yesterday) was $2.00, and whose dividend is expected to grow indefinitely at a 5 percent rate.

a. What is the firm’s expected dividend stream over the next 3 years?                         
b. What is the firm’s current stock price?
c. What is the stock's expected value 1 year from now?            
d. What are the expected dividend yield, the capital gains yield, and the total return for Techtron during the first year.              

Answer 1

1. Year1 dividend=D0*(1+growth rate)=2*(1+5%)=$2.1

Year2 dividend=D1*(1+5%)=$2.1*(1.05)=$2.205

Year3 dividend=D2*(1+5%)=$2.205*(1+5%)=$2.32

2. Firm's stock price at year0=D1/(required rate of return-growth rate)=$2.1/(13%-5%)=$26.25

3. Firm's expected Stock price at year1=D2/(required rate of return-growth rate)=2.205/8%=$27.57

4. Expected dividend yield=D1/Share price at year0=2.1/26.25=8%

Capital gains yield=(27.57-26.25)/26.25=5%

Total Expected return=Dividend yield+Capital gains yield=8%+5%=13%