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

a) D1(2013) = D0 * 1.15 > round dividend DOWN to nearest penny,

D2(2013) = D1* 1.15, etc.

D5 is for 2017

b.) D6 (2018) will be D5*1.05, price at end of 2017will be

D6/(r-g) = D6/(0.12 - 0.05)

discount the dividends: D1/(1.12^1) + D2/(1.12^2) +...etc. + D5/(1.12^5)

then discount the price as of end year 5 (price at end 2017 as calc'd in first line of "b") P5/1.12^5

add all of these together = P0 (price today)

c.) you now have most of the info to calc these answers - be sure to use value of P0 when calcing cap gains.

Price at end of year 2018 will be D7 (which is D6*1.05)/(r-g)<<where r-g = 0.12 - 0.05

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