Question

Conroy Consulting Corporation (CCC) has been growing at a rate of 27% per year in recent years. This same nonconstant growth rate is expected to last for another 2 years (g_0,1 = g_1,2 = 27%).

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1. If D₀ = $1.10, r_s = 13% and g_L = 7%, then what is CCC's stock worth today? Do not round intermediate calculations. Round your answer to the nearest cent.

   $  

   What is its expected dividend yield for the first year? Do not round intermediate calculations. Round your answer to two decimal places.

     %

   What is its capital gains yields for the first year? Do not round intermediate calculations. Round your answer to two decimal places.

     %

2. Now assume that CCC's period of nonconstant growth is to last another 5 years rather than 2 years (g_0,1 = g_1,2 = g_2,3 = g_3,4 = g_4,5 = 27%). How would this affect its price, dividend yield, and capital gains yield?

   I. Due to the longer period of nonconstant growth, the value of the stock will be lower for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the nonconstant growth period.
   II. Due to the longer period of nonconstant growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the nonconstant growth period.
   III. Due to the longer period of nonconstant growth, the value of the stock will be higher for each year. The total return as well as the distribution between dividend yield and capital gains yield will remain the same for the duration of the nonconstant growth period.
   IV. Due to the longer period of nonconstant growth, the value of the stock will be lower for each year. The total return as well as the distribution between dividend yield and capital gains yield will differ for the duration of the nonconstant growth period.
   V. Due to the longer period of nonconstant growth, the value of the stock will be higher for each year. Although the total return will remain the same, the distribution between dividend yield and capital gains yield will differ for the duration of the nonconstant growth period.

3. What will CCC's dividend yield and capital gains yield be once its period of nonconstant growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of nonconstant growth, and the calculations are very easy.) Do not round intermediate calculations. Round your answers to two decimal places.

   Dividend yield:   %

   Capital gains yield:   %

4. Of what interest to investors is the relationship over time between dividend yield and capital gains yield?
   I. Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the capital gain during the year, while taxes on the dividends can be delayed until the stock is sold.
   II. It is of no interest to investors whether they receive dividend income or capital gains income, since both types of income are always taxed at the same rate.
   III. It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income must be paid in the current year.
   IV. It is of no interest to investors whether they receive dividend income or capital gains income, since taxes on both types of income can be delayed until the stock is sold.
   V. Some investors need cash dividends, while others would prefer growth. Also, investors must pay taxes each year on the dividends received during the year, while taxes on the capital gain can be delayed until the gain is actually realized.

Answer 1

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