Question

Now assume that Temp Force's dividend is expected to experience nonconstant growth of 30% from year 0 to Year 1, 25% from Year 1 to Year 2, and 15% from Year 2 to Year 3. After Year 3, dividends will grow at a constant rate of 6%. What is the stocks intrinsic value under these conditions? What are the expected dividend yield and capital gains yield during the first year? What are the expected dividend yield and capital gains yield during the fourth year (from Year 3 to Year 4)?

Dividends
D0	2	$       2.00
D1	2*(1.30)	$       2.60
D2	2.6*(1.25)	$       3.25
D3	3.25*(1.15)	$       3.74

Rs	13%
g	6%

Expected Dividend Yield	7%
Capital Gain Yield	6%
Total Return	13%
Expected Rate of Return	13%

Answer 1

Year	Dividend	PV @13%	Present Value
1	$                      2.6000	0.8850	$         2.30
2	$                      3.2500	0.7831	$         2.55
3	$                      3.7375	0.6931	$         2.59
3	$                    56.5964	0.6931	$       39.22
Current Price			$       46.66
Horizon Value = $3.74 x (1+6%)/(13%-6%)	$                        56.60
Expected Dividend Yield = 2.60/46.66	5.57%
Capital Gain Yield = 13% - 5.57%	7.43%
Total Return	13.00%
Expected Dividend and CG Yields at t = 3
Dividend Yield = $0/56.5964	0%
CG Yield = 13% - 0%	13%
Total Return =	13%