Goodwin Technologies has been wildly successful but has yet to pay a dividend. A

Question

Goodwin Technologies 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 expectes Goodwin to pay a $2.2500 dividend at that time and believes that the dividend will grow by 11.70% for the following two years. However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 3.60% per year. Good win's required return is 12.00%. 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, carry the dividend value to four decimal places. Horizon value: ? Current Intrinsic value: ? Assuming that the markets are in equilibrium, Goodwin's current expected dividen yield is ?, and Goodwin's capital gains yield is? 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's investment opportunities are poor. Is this statement a possible explanation for why the firm hasn't paid a dividend yet? No or yes

Explanation / Answer

D3 = $2.2500

D4 = $2.25(1.117) = $2.5133

D5 = $2.5133(1.117) = $2.8073

D6 = $2.8073(1.036) = $2.9084

Required Return = 12%

1). P5 = D6/(required return - constant growth rate)

= $2.9084/(0.12-0.036) = $34.62

2). Current Intrinsic Value = D3/(1+r)^3 + D4/(1+r)^4 + (D5+P5)/(1+r)^5

= $2.25/1.12^3 + $2.5133/1.12^4 + ($2.8073 + $34.6234)/1.12^5

= $1.6015 + $1.5972 + $21.24 = $24.44

3). Expected Dividend Yield = 0%; as the company doesn't pay a dividend right now.

4). Hence, Capital Gains Yield = Required Return - Dividend Yield

= 12% - 0% = 12%

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