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Taussig Technologies Corporation (TTC) has been growing at a rate of 12% per year in recent years. This same growth rate is expected to last for another 2 years, then decline to gn = 6%.
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Value of stock is equal to present value of all future dividends
= 1.50(1.12)/(1.13) + 1.50(1.12)^2/(1.13)^2 + 1.50(1.12)^2(1.06)/(1.13)^2(13%-6%)
= $25.27 per share
Dividend yield = Expected Dividend/Current Price
= 1.50(1.12)/25.27
= 6.65%
Capital gains yield = 13%-6.65%
= 6.35%
b.III. 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.
c.Value of share after supernormal period ends = 1.50(1.12)^2(1.06)/ (13%-6%)
= $28.49
Dividend yield = 1.99/28.49
= 6.98%
Capital gains yield = 13-6.98
= 6.02%
IV. 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.