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 $3.00000 dividend at that time (D₃ = $3.00000) and believes that the dividend will grow by 15.60000% 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 3.78000% per year. Goodwin’s required return is 12.60000%. 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.

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? No Yes

Answer 1

The calculation for the Horizon value and Intrinsic value is as below:

Particulars	Year 1	Year 2	Year 3	Year 4	Year 5	Year 6	Total
Dividend	-	-	3.00	3.47	4.01	4.16
Growth rate in Dividend (g)				15.60%	15.60%	3.78%
Required return (r)	0.00%	12.60%	12.60%	12.60%	12.60%	12.60%
Horizon value (Dividend year 6/(r-g))						47.17
PV of Dividend	-	-	2.37	2.43	2.49		7.29
PV of Horizon Value						29.34	29.34
PV of Intrinsic Value = (PV of Dividends+PV of Horizon Value)	-	-	2.37	2.43	2.49	29.34	36.63

Current expected dividend yield for one year forward would be 0% since no dividend will be paid next year.

Capital gain yield would be 12.6%, since the required rate of return for Goodwin is 12.6% and dividend yield is 0%.

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. In the earlier years since the investment opportunities were good, the company has reinvested its earnings in business to capitalise on the opportunities available. Hence the statement by Goodwin in the report is a possible explanation for why the firm has not paid dividends so far.