Nonconstant growth Assume that it is now January 1, 2013. Wayne-Martin Electric

Question

Nonconstant growth

Assume that it is now January 1, 2013. Wayne-Martin Electric Inc. (WME) has just 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 15% annual growth rate for the next 5 years. Other firms will have developed comparable technology at 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 $1.75 per share.

Explanation / Answer

1.)
D2013 = $1.75*1.15 = $2.01
D2014 = $2.01*1.15 = $2.31
D2015 = $2.31*1.15 = $2.66
D2016 = $2.66*1.15 = $3.06
D2017 = $3.06*1.15 = $3.52

2.) D2018 will be D2017*1.05, price at end of 2017 will be D2017/(r-g) = D2017/(0.12 - 0.05) = $3.52/0.07= $50.29

discount the dividends: $2.01/1.12 + $2.31/1.12^2 + $2.66/1.12^3 + $3.06/1.12^4 + $3.52/1.12^5 = $9.47

SO P0 = $9.47 + $50.29/1.12^5 = $38.0

3.) D1/P0 = 2.01/38 = 0.0529 = 5.29%

So capital gains yield = (P1-P0)/P0

Expected total return = (P1-P0+Dividends)/P0

D6/P5 = 3.7/50.29 = 0.0736 = 7.36%

So capital gains yield = (P1-P0)/P0

Expected total return = (P1-P0+Dividends)/P0

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