In: Finance
NONCONSTANT GROWTH
Assume that it is now January 1, 2017. Wayne-Martin Electric
Inc. (WME) has developed...
NONCONSTANT GROWTH
Assume that it is now January 1, 2017. Wayne-Martin Electric
Inc. (WME) has developed a solar panel capable of generating 200%
more electricity than any other solar panel currently on the
market. As a result, WME is expected to experience a 14% annual
growth rate for the next 5 years. Other firms will have developed
comparable technology by the end of 5 years, and WME's growth rate
will slow to 4% per year indefinitely. Stockholders require a
return of 12% on WME's stock. The most recent annual dividend
(D0), which was paid yesterday, was $1.88 per share.
- Calculate WME's expected dividends for 2017, 2018, 2019, 2020,
and 2021. Round your answers to the nearest cent. Do not round your
intermediate calculations.
D2017 = $
D2018 = $
D2019 = $
D2020 = $
D2021 = $
- Calculate the value of the stock today, . Proceed by finding
the present value of the dividends expected at the end of 2017,
2018, 2019, 2020, and 2021 plus the present value of the stock
price that should exist at the end of 2021. The year end 2021 stock
price can be found by using the constant growth equation. Notice
that to find the December 31, 2021, price, you must use the
dividend expected in 2022, which is 4% greater than the 2021
dividend.
Round your answer to the nearest cent. Do not round your
intermediate calculations.
$
- Calculate the expected dividend yield
(D1/P0), capital gains yield, and total
return (dividend yield plus capital gains yield) expected for 2017.
(Assume that and recognize that the capital gains yield is equal
to the total return minus the dividend yield.) Round your answers
to two decimal places. Do not round your intermediate calculations.
D1/P0 = %
Capital gains yield = %
Expected total return = %
Then calculate these same three yields for 2022. Round your
answers to two decimal places. Do not round your intermediate
calculations.
D6/P5 = %
Capital gains yield = %
Expected total return = %
- How might an investor's tax situation affect his or her
decision to purchase stocks of companies in the early stages of
their lives, when they are growing rapidly, versus stocks of older,
more mature firms? When does WME's stock become "mature" for
purposes of this question?
- 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. The firm's stock is
"mature" at the end of 2021.
- People in high-income tax brackets will be more inclined to
purchase "growth" stocks to take the capital gains and thus delay
the payment of taxes until a later date. The firm's stock is
"mature" at the end of 2021.
- Some investors need cash dividends, while others would prefer
growth. 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. The firm's stock is "mature" at the end of
2021.
- 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. The firm's stock is "mature" at the
end of 2021.
- 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. The firm's stock is "mature" at
the end of 2021.
-Select-IIIIIIIVVItem 13
- Suppose your boss tells you she believes that WME's annual
growth rate will be only 12% during the next 5 years and that the
firm's long-run growth rate will be only 4%. Without doing any
calculations, what general effect would these growth rate changes
have on the price of WME's stock?
- Since the firm's supernormal and normal growth rates are lower,
the dividends and, hence, the present value of the stock price will
be lower. The total return from the stock will decline, and both
the dividend yield and the capital gains yield will be smaller than
they were with the original growth rates.
- Since the firm's supernormal and normal growth rates are lower,
the dividends and, hence, the present value of the stock price will
be lower. The total return from the stock will increase, and both
the dividend yield and the capital gains yield will be greater than
they were with the original growth rates.
- Since the firm's supernormal and normal growth rates are lower,
the dividends and, hence, the present value of the stock price will
be lower. The total return from the stock will decline, and the
dividend yield and the capital gains yield will be the same.
- Since the firm's supernormal and normal growth rates are lower,
the dividends and, hence, the present value of the stock price will
be lower. The total return from the stock will remain the same, but
the dividend yield will be larger and the capital gains yield will
be smaller than they were with the original growth rates.
- Since the firm's supernormal and normal growth rates are lower,
the dividends and, hence, the present value of the stock price will
be lower. The total return from the stock will remain the same, but
the dividend yield will be smaller and the capital gains yield will
be larger than they were with the original growth rates.
-Select-IIIIIIIVVItem 14
- Suppose your boss also tells you that she regards WME as being
quite risky and that she believes the required rate of return
should be 14%, not 12%. Without doing any calculations, determine
how the higher required rate of return would affect the price of
the stock, the capital gains yield, and the dividend yield. Again,
assume that the long-run growth rate is 4%.
- As the required return increases, the price of the stock goes
down, but both the capital gains and dividend yields decrease
initially.
- As the required return increases, the price of the stock goes
up, and both the capital gains and dividend yields increase
initially.
- As the required return increases, the price of the stock goes
up, and both the capital gains and dividend yields decrease
initially.
- As the required return increases, the price of the stock
remains the same since both the capital gains and dividend yields
remain constant.
- As the required return increases, the price of the stock goes
down, but both the capital gains and dividend yields increase
initially.