9. Stocks that don't pay dividends yet Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $2.00000 dividend at that time (D, = $2.00000) and believes tha the dividend will grow by 10.40000% for the fllowing two years (D, and D;). However, after the fifth year, she expects Goodwin's dividend to grow a constant rate of 3.54000% per year. Goodwin's required return is 11.80000%. Fill in the following chart to determine Goodwin's horizon value at the horizon date (when constant growth begins) and the current intrinsic value. To increase the accuracy of your calculations, do not round your intermediate calculations, but round all final answers to two decimal places. Term Value Horizon value Current intrinsic value If investors expect a total return of 12.80%, what will be Goodwin's expected dividend and capital gains yield in two years-that is, the year before the firm begins paying dividends? Again, remember to carry out the dividend values to four decimal places. (Hint: You are at year 2, and the first dividend is expected to be paid at the end of the year. Find DY, and CGY,.) Expected dividend yield (DY,) Expected capital gains yield (CGY,) Goodwin has been very successful, but it hasn't paid a dividend yet. It circulates a report to its key investors containing the following statement: Goodwin has yet to record a profit (positive net income). Is this statement a possible explanation for why the firm hasn't paid a dividend yet? No Yes
9. Stocks that don't pay dividends yet Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is likely to pay its first dividend three years from now. She expects Goodwin to pay a $2.00000 dividend at that time (D, = $2.00000) and believes tha the dividend will grow by 10.40000% for the fllowing two years (D, and D;). However, after the fifth year, she expects Goodwin's dividend to grow a constant rate of 3.54000% per year. Goodwin's required return is 11.80000%. Fill in the following chart to determine Goodwin's horizon value at the horizon date (when constant growth begins) and the current intrinsic value. To increase the accuracy of your calculations, do not round your intermediate calculations, but round all final answers to two decimal places. Term Value Horizon value Current intrinsic value If investors expect a total return of 12.80%, what will be Goodwin's expected dividend and capital gains yield in two years-that is, the year before the firm begins paying dividends? Again, remember to carry out the dividend values to four decimal places. (Hint: You are at year 2, and the first dividend is expected to be paid at the end of the year. Find DY, and CGY,.) Expected dividend yield (DY,) Expected capital gains yield (CGY,) Goodwin has been very successful, but it hasn't paid a dividend yet. It circulates a report to its key investors containing the following statement: Goodwin has yet to record a profit (positive net income). Is this statement a possible explanation for why the firm hasn't paid a dividend yet? No Yes
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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Concept explainers
Dividend Valuation
Dividend refers to a reward or cash that a company gives to its shareholders out of the profits. Dividends can be issued in various forms such as cash payment, stocks, or in any other form as per the company norms. It is usually a part of the profit that the company shares with its shareholders.
Dividend Discount Model
Dividend payments are generally paid to investors or shareholders of a company when the company earns profit for the year, thus representing growth. The dividend discount model is an important method used to forecast the price of a company’s stock. It is based on the computation methodology that the present value of all its future dividends is equivalent to the value of the company.
Capital Gains Yield
It may be referred to as the earnings generated on an investment over a particular period of time. It is generally expressed as a percentage and includes some dividends or interest earned by holding a particular security. Cases, where it is higher normally, indicate the higher income and lower risk. It is mostly computed on an annual basis and is different from the total return on investment. In case it becomes too high, indicates that either the stock prices are going down or the company is paying higher dividends.
Stock Valuation
In simple words, stock valuation is a tool to calculate the current price, or value, of a company. It is used to not only calculate the value of the company but help an investor decide if they want to buy, sell or hold a company's stocks.
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Question
Transcribed Image Text:9. Stocks that don't pay dividends yet
Goodwin Technologies, a relatively young company, has been wildly successful but has yet to pay a dividend. An analyst forecasts that Goodwin is
likely to pay its first dividend three years from now. She expects Goodwin to pay a $2.00000 dividend at that time (D, = $2.00000) and believes that
the dividend will grow by 10.40000% for the following two years (D, and D;). However, after the fifth year, she expects Goodwin's dividend to grow at
a constant rate of 3.54000% per year.
Goodwin's required return is 11.80000%. Fill in the following chart to determine Goodwin's horizon value at the horizon date (when constant growth
begins) and the current intrinsic value. To increase the accuracy of your calculations, do not round your intermediate calculations, but round all final
answers to two decimal places.
Term
Value
Horizon value
Current intrinsic value
If investors expect a total return of 12.80%, what will be Goodwin's expected dividend and capital gains yield in two years-that is, the year before
the firm begins paying dividends? Again, remember to carry out the dividend values to four decimal places. (Hint: You are at year 2, and the first
dividend is expected to be paid at the end of the year. Find DY, and CGY,.)
Expected dividend yield (DY,)
Expected capital gains yield (CGY,)
Goodwin has been very successful, but it hasn't paid a dividend yet. It circulates a report to its key investors containing the following statement:
Goodwin has yet to record a profit (positive net income).
Is this statement a possible explanation for why the firm hasn't paid a dividend yet?
O No
O Yes
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