Question

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 $1.75000 dividend at that time (D₃ = $1.75000) and believes that the dividend will grow by 9.10000% for the following two years (D₄ and D₅). However, after the fifth year, she expects Goodwin’s dividend to grow at a constant rate of 3.48000% per year.

Goodwin’s required return is 11.60000%. 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’s investment opportunities are poor.

Is this statement a possible explanation for why the firm hasn’t paid a dividend yet?

Yes

No

Answer 1

Horizon value of Goodwin’s stock at the end of year 5

Dividend in Year 3 (D3) = $1.75 per share

Dividend in Year 4 (D4) = $1.9093 per share [$1.75 x 109.10%]

Dividend in Year 5 (D5) = $2.0830 per share [$1.9093 x 109.10%]

Dividend Growth Rate after 5^th year (g) = 3.48% per year

Required Rate of Return (Ke) = 141.60%

Therefore, the Horizon value of Goodwin’s stock at the end of year 5 = D5(1 + g) / (Ke – g)

= $2.0830(1 + 0.0348) / (0.1160 – 0.0348)

= $2.1555 / 0.0812

= $26.55 per share

“Hence, the Horizon value of Goodwin’s stock will be $26.55”

Current intrinsic value of Goodwin Technologies’ stock

As per Dividend Discount Model, Current Intrinsic Value is the aggregate of the Present Value of the future dividend payments and the present value the Horizon Value

Year	Cash flow ($)	Present Value factor at 11.60%	Present Value of cash flows ($)
3	1.7500	0.71946	1.26
4	1.9093	0.64468	1.23
5	2.0830	0.57767	1.20
5	26.55	0.57767	15.33
TOTAL			19.03

“Hence, the Current intrinsic value of Goodwin Technologies’ stock will be $19.03”

Goodwin’s current expected dividend and capital gains yields

Current Expected Dividend Yield

Current Expected Dividend Yield = 0.00%

Current Expected Capital Gains Yield

Current Expected Capital Gains Yield would be the Goodwin’s Required Rate of Return = 11.60%

Current Expected Dividend Yield = 0.00%

Current Expected Capital Gains Yield = 11.60%