. The Exacta Corp. is expected to pay a dividend of $0.80 in the coming year. Th

Question

. The Exacta Corp. is expected to pay a dividend of $0.80 in the coming year. Their dividend is expected to grow at a rate of 40% in the following year, and 20% for the next three years after that. From then on, the dividend is expected to grow at a rate of 4% for the foreseeable future. If the required rate of return for Exacta’s common stock is 11%, what should be the stock’s price per share? If you were to buy the stock at the price you have just calculated, what would be the expected dividend yield and capital gains yield for the first year? (8 pts)

Explanation / Answer

1) Year Dividend ($) pvif @ 11% PV 1 0.80 0.9009 0.72 2 1.12 0.8116 0.91 3 1.34 0.7312 0.98 4 1.61 0.6587 1.06 5 1.94 0.5935 1.15 Sum of PV of dividends t1 to t5 = 4.82 Horizon value = (1.94*1.04)/(0.11-0.04) = 28.82 PV of horizon value = 28.82*0.5935 17.10 Price per share = $21.93 2) Dividend yield for the first year = 0.80/21.93=3.65% 3) Capital gains yield for the first year: Price per share at the end of the 1st year = Year Dividend ($) pvif @ 11% PV 2 1.12 0.9009 1.01 3 1.34 0.8116 1.09 4 1.61 0.7312 1.18 5 1.94 0.6587 1.27 Sum of PV of dividends t1 to t5 = 4.55 Horizon value = (1.94*1.04)/(0.11-0.04) = 28.82 PV of horizon value = 28.82*0.6587 18.98 Price per share = $             23.54 Capital gains yield = (23.54-21.93)/21.93 = 7.34%

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