Question

Swink Electric, Inc., has just developed a solar panel capable of generating

200 percent more electricity than any solar panel currently on the market. As a

result, Swink is expected to experience a 15 percent annual growth rate for the

next five years. When the five-year period ends, other firms will have developed

comparable technology, and Swink’s growth rate will slow to 5 percent per year

indefinitely. Stockholders require a return of 12 percent on Swink’s stock.

The firm’s most recent annual dividend (D0), which was paid yesterday, was

$1.75 per share.

2.d. (6 points)	Calculate the dividend yield (D1/P0), the expected capital gains yield for the current year (Year 1).
Hint: The total rate of return is equal to dividend yield plus capital gains yield. Total rate of return is equal to the required rate of return.
Dividend yield = D1/P0
Total expected rate of return
Expected Capital gains yield

Answer 1

The terminal value is generated as a result of all the future dividends that grow at an indefinite rate of 5% from year 6 onward. This Terminal value is obtained in year 5 and hence to obtain its present value it is discounted by 5 years.