Question

Assume that it is now January 1, 2019. 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 5% per year indefinitely. Stockholders require a return of 12% on WME's stock. The most recent annual dividend (D₀), which was paid yesterday, was $1.55 per share.

1. Calculate WME's expected dividends for 2019, 2020, 2021, 2022, and 2023. Do not round intermediate calculations. Round your answers to the nearest cent.
   

   D₂₀₁₉ = $  

   D₂₀₂₀ = $  

   D₂₀₂₁ = $  

   D₂₀₂₂ = $  

   D₂₀₂₃ = $  

2. 
   
3. Calculate the value of the stock today, . Proceed by finding the present value of the dividends expected at the end of 2019, 2020, 2021, 2022, and 2023 plus the present value of the stock price that should exist at the end of 2023. The year end 2023 stock price can be found by using the constant growth equation. Notice that to find the December 31, 2023, price, you must use the dividend expected in 2024, which is 5% greater than the 2023 dividend. Do not round intermediate calculations. Round your answer to the nearest cent.
   $   
   
4. Calculate the expected dividend yield (D₁/P₀), capital gains yield, and total return (dividend yield plus capital gains yield) expected for 2019. (Assume that    and recognize that the capital gains yield is equal to the total return minus the dividend yield.) Do not round intermediate calculations. Round your answers to two decimal places.

   D₁/P₀ =   %

   Capital gains yield =   %

   Expected total return =   %

   Then calculate these same three yields for 2024. Do not round intermediate calculations. Round your answers to two decimal places.

   D₆/P₅ =   %

   Capital gains yield =   %

   Expected total return =   %

5. 
   
6. 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?
   
   1. 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 2023.
   2. 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 2023.
   3. 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 2023.
   4. 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 2023.
   5. 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 2023.

Answer 1

a.WME's expected dividends for 2019, 2020, 2021, 2022, and 2023
D1=D0*(1+growth rate)
D2019 = $	1.55*1.14=	1.767
D2020 = $	1.767*1.14=	2.0144
D2021 = $	2.0144*1.14=	2.2964
D2022 = $	2.2964*1.14=	2.6179
D2023 = $	2.6179*1.14=	2.9844

Present value of the stock price that should exist at the end of 2023

PV of stock price at end 2023=(D2024)/(Reqd. return-growth rate)

Given the constant growth rate after 2023 of 5%

PV of stock price(end 2023)=(2.9844*1.05)/(12%-5%)=

44.766

c. Value of the stock today
is the present value of all the above cash flows :
	Year 0	2019	2020	2021	2022	2023
Expected div.		1.767	2.01438	2.2964	2.6179	2.9844
Terminal cash flow						44.7660
Total		1.767	2.01438	2.296416	2.617896	47.75041
PV F at 12%(1/1.12^n)		0.892857	0.797194	0.71178	0.635518	0.567427
PV at 12%		1.5777	1.6059	1.6345	1.6637	27.0949
PV of stock price	33.58
ie.	34

d.
For 2019
D1/P0 = (1.767/33.58=	5.26%
Capital gains Yield= Total return%(reqd.)-Dividend yield (as above)(12%-5.26%)
Capital gains yield =   %	6.74%
Expected total return =   %	12.00%

For 2024
D6/P5=D2023*(1.05)/P5
ie. (2.9844*1.05)/44.766=	7.00%
Capital gains yield =(12%-7%)	5.00%
Expected total return =   %	12.00%

f:

i. 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 2023.

More dividend means more taxes . Those in high-income tax brackets , may have more tax cash outflows on dividends.

Unlike on dividends,payment of capital gains taxes can be delayed till the stock is sold at a later date.

WME's stock become "mature" when the dividend growth rate becomes constant at 5% , ie. From start of year 2024