Question

NONCONSTANT GROWTH STOCK VALUATION

Taussig Technologies Corporation (TTC) has been growing at a rate of 18% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to g_n = 5%.

1. If D₀ = $1.60 and r_s = 10.00%, what is TTC's stock worth today? Round your answer to the nearest cent. Do not round your intermediate calculations.
   $
   
   What is its expected dividend yield at this time, that is, during Year 1? Round your answer to two decimal places. Do not round your intermediate calculations.
   %
   
   What is its capital gains yields at this time, that is, during Year 1? Round your answer to two decimal places. Do not round your intermediate calculations.
   %
   
2. Now assume that TTC's period of supernormal growth is to last for 5 years rather than 2 years. How would this affect the price, dividend yield, and capital gains yield?
   
   1. Due to the longer period of supernormal 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 supernormal growth period.
   2. Due to the longer period of supernormal 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 supernormal growth period.
   3. Due to the longer period of supernormal 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 supernormal growth period.
   4. Due to the longer period of supernormal 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 supernormal growth period.
   5. Due to the longer period of supernormal 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 supernormal growth period.
   
   -Select-IIIIIIIVVItem 4
   
3. What will TTC's dividend and capital gains yields be once its period of supernormal growth ends? (Hint: These values will be the same regardless of whether you examine the case of 2 or 5 years of supernormal growth; the calculations are very easy.)
   Round your answers to two decimal places.
   
   Dividend yield
   %
   
   Capital gains yield
   %
   
4. Of what interest to investors is the changing relationship between dividend and capital gains yields over time?
   1. 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.
   2. 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.
   3. 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.
   4. 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.
   5. 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