Goodwin Technologies, a relatively young company, has been wildly successful but
ID: 2743281 • Letter: G
Question
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 $4.7500 dividend at that time (D_3 = $4.7500) and believes that the dividend will grow by 24.70% for the following two years (D_4 and D_5). However, after the fifth year, she expects Goodwin's dividend to grow at a constant rate of 4.20% per year. Goodwin's required return is 14.00%. FIB 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 values to four decimal places. If investors expect a total return of 15.00%, what win 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.Explanation / Answer
We have:
D3 = 4.75
D4 = D3 x (1+g)
= 4.75 x (1+0.2470)
= 5.92325
D5= D4 x (1+g)
= 5.92325 x (1+0.2470)
= 7.3863
Horizon value = D5 x (1+g)/ (R-g)
= 7.3863 x(1+0.0420)/(0.14-0.0420)
= 78.54
Now intrinsic value would be the present value of future dividend and prices:
Year
Cash flow
PV factor 14%
PV
1
0
0.87719
0.00
2
0
0.76947
0.00
3
4.75
0.67497
3.21
4
5.92325
0.59208
3.51
5
7.3863
0.51937
3.84
5
78.54
0.51937
40.79
51.34
Therefore, current intrinsic value would be 51.34.
Year
Cash flow
PV factor 14%
PV
1
0
0.87719
0.00
2
0
0.76947
0.00
3
4.75
0.67497
3.21
4
5.92325
0.59208
3.51
5
7.3863
0.51937
3.84
5
78.54
0.51937
40.79
51.34
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