Question

In: Finance

9. Stocks that don't pay dividends yet Goodwin Technologies, a relatively young company, has been wildly...

9. Stocks that don't pay dividends yet

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 $2.00000 dividend at that time (D₃ = $2.00000) and believes that the dividend will grow by 10.40000% 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 3.54000% per year.

Goodwin’s required return is 11.80000%. 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 has yet to record a profit (positive net income).

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

No

Yes

Solutions

Expert Solution

Answer : Calculation of Horizon Value and Current Intrinsic Value :

Current Intrinsic Value = Sum of Present value of Dividend and Horizon Value

Below is the table showing Calculation of Horizon Value :

Year Dividend PVF @11.8% Present Value of Dividend
1 0 0.894454383 0
2 0 0.800048643 0
3 2 0.715607015 1.43121403
4 2.208 0.640077831 1.413291851
5 2.437632 0.572520421 1.3955941
5 30.5559827 0.572520421 17.4939241
Total 21.73402408

W.N

Horizon Value = Dividend in year 6 / (Required Return - growth rate)

= [2.437632 * (1 + 0.0354)] / (0.118 - 0.0354)

= 2.5239241728 / 0.0826

= 30.55559827

Therefore Horizon Value is 30.56

Current Intrinsic Value is 21.73

Calculation of Current Dividend Yield

Since the company pay no dividend in year 1 current dividend yield is 0%

Calculation of Current Capital Gain  Yield :

Current Capital Gain Yield = 11.8 % i.e equal to expected return as expected return is sum of  Current Dividend Yield and Current Capital Gain Yield .And as dividend yield is 0% the capital gain yield will be 13.8%

Yes the statement is possible explanation for why the firm hasn't paid a dividend yet.


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