Question

Reizenstein Technologies (RT) has just developed a solar panel capable of generating 200% more electricity than any solar panel currently on the market. As a result, RT is expected to experience a 20% annual growth rate for the next 5 years. By the end of 5 years, other firms will have developed comparable technology, and RT's growth rate will slow to 7% per year indefinitely. Stockholders require a return of 16% on RT's stock. The most recent annual dividend (D₀), which was paid yesterday, was $2.20 per share.

D1=2.64, D2=3.17, D3=3.80, D4=4.56, D5=5.47, Intrinsic value of the stock today=43.14

1a) Calculate the expected dividend yield (D₁/  ), the capital gains yield expected during the first year, and the expected total return (dividend yield plus capital gains yield) during the first year. (Assume that  = P₀, 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 computations.

Expected dividend yield

Capital gains yield

Expected total return= 16%

1b) Also calculate these same three yields for t = 5 (e.g., D₆/  ). Round your answers to two decimal places. Do not round your intermediate computations.

Expected dividend yield

Capital gains yield

Expected total return

Answer 1

Ans.

Year	Dividend	PVIFA at 16%	PV at 16%
0	2.2	1
1	2.64	0.862068966	2.28
2	3.17	0.743162901	2.36
3	3.8	0.640657674	2.43
4	4.56	0.552291098	2.52
5	5.47	0.476113015	2.60
PV of dividends t1 to t5 =			$       12.19
Continuing value of dividend = 5.47*1.07/(0.16-0.07) =	$65.03
PV of continuing value = 65.03*0.476113015 =	$30.96
Intrinsic value of the stock today		$43.15

Expected dividend yield for 1st year = $ 2.64 / $ 43.15 = 0.0611 or 6.11%

Price 1 year from now:	Dividend	PVIFA at 16%	PV at 16%
2	3.17	0.862068966	2.73
3	3.8	0.743162901	2.82
4	4.56	0.640657674	2.92
5	5.47	0.552291098	3.02
PV of dividends t2 to t5 =		$       11.50
Continuing value of dividend = 5.47*1.07/(0.16-0.07) =	$65.03
PV of continuing value = 65.03 *0.552291098 =	$35.92
Intrinsic value of the stock 1 Year from today	$47.42

Capital gains yield = (47.42/43.15)-1 = 0.09895 or 9.89%

Expected total return = 6.11 + 9.89 =  16.00%

1b)

Expected dividend yield for the 6th year = 5.47*1.07/ $ 65.03 = 0.090 = 9.00%

Price at the end of the 6th year = 5.47*1.07^2/(0.16-0.07)= $ 69.584

Capital gains yield = ($ 69.58 /$ 65.03)-1 = 0.0700 or 7%

Expected total return = 9% + 7% =  16.00%